SUMMER 2016 W W W. P W - M A G . C O M
A D V I S I N G T H E E X C E P T I O N A L LY A F F L U E N T
A PERFECT UNION CLIENTS MAY HAVE BEEN THE REAL WINNERS WHEN ATLANTIC TRUST PRIVATE WEALTH MANAGEMENT WAS ACQUIRED BY CIBC.
John S. Markwalter, David L. Donabedian and Paulina Mejia of Atlantic Trust Private Wealth Management
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I N T E R N AT I O N A L
“The CIMA credential gave me confidence to be at the table with financial analysts and institutional portfolio managers. The CIMA certification tells advisors that I also understand the investment side of the business, that I can help them construct model portfolios through disciplined investing. Earning the CIMA certification has enhanced my competence, confidence, and credibility.” IMCA member/outdoor enthusiast Kelly Walsh, CIMA® National Director, Advisor Coaching, Credential Financial Vancouver, Canada
For 30 years, Investment Management Consultants Association® (IMCA®) has set the standard for the investment consulting and wealth management profession. We are focused on providing the most advanced professional development education in the financial services industry through our Certified Investment Management Analyst® (CIMA®) and Certified Private Wealth Advisor® (CPWA®) certifications, along with conferences, membership, publications, and research. If you are passionate about lifelong learning and want to enhance your knowledge and skills around investment advice and wealth management, you belong at IMCA.
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CONTENTS
V ol u m e 1 0 | Nu m ber 2
John S. Markwalter, David L. Donabedian and Paulina Mejia of Atlantic Trust Private Wealth Management
in every issue
10 12 13
Editor’s Note By Ray Fazzi
PW News
Family
60
Wealth Continuity By David Lansky
After The Facts By Russ Alan Prince
FEATURES
16
A Perfect Union Clients may have been the real winners when Atlantic Trust Private Wealth Management was acquired by CIBC. By Eric L. Reiner
20 Death and Taxes For Wealthy Foreigners
Rich immigrants are streaming into the U.S. and they’re bringing lots of assets and estate planning needs with them. By Carol J. Clouse
26 Filling The Climate Gap
The Rockefeller Foundation is trying to help fill a $2.5 trillion gap in the drive for a healthier world. By Thomas M. Kostigen
Ranked as one of America’s fastest-growing companies in the Inc. 5000 for 2013 cover photograph and this page by Christopher Hamilton
summer 2016 | private wealth magazine | 3
CONTENTS 14
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32 The South Dakota Story
The state’s trust laws have evolved to meet modern wealth-transfer needs. South Dakota Trust Association
44 Growing Pains
Liquid alternatives find hope for renaissance after dry stretch. By David Sterman
business management practice development 51
14
SFOs Ante Up On Private Equity Wealthy families like the sector’s performance, and they often have expertise to offer for the businesses they invest in. By Hannah Shaw Grove
wealth management investing
30 An Investment To Flip Over
U.S. rare coins provide investors with more than just a chance to own something that once sat in George Washington’s pocket. By Michael Contursi
estate planning 53
49 When Is An Inheritance Too Big?
Rich clients are increasingly pondering this question as they try to create wills that will enhance rather than ruin their children’s lives. By Robert G. Kuchner
51
The Virtual Estate Fiduciaries who need access to a deceased client’s digital assets continue to run into a web of obstacles. By Marjorie Suisman
insurance
53 ‘Storm’ Hits Life Insurers
Low interest rates, squeezed profits and longer life spans have created a “perfect storm” for life insurance firms and their policyholders. By David Buckwald and Jeffrey D. Dattolo
4 | private wealth magazine | summer 2016
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7th Annual
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Using Liquid & Traditional Strategies To Diversify & Improve Alpha September 19-20 | Sheraton Denver Downtown
The World’s Largest Alternative Investments Event Designed Exclusively For Financial Advisors, Wealth Managers And Family Offices! This event brings together readers from Financial Advisor and Private Wealth magazines, including financial advisors, RIAs, independent and wirehouse reps, private bankers, wealth advisors, trust officers and family offices, to learn about and discuss various categories of alternative investments, including: Hedge Funds, Private Equity, Specialty ETFs and Mutual Funds, REITs, Managed Futures, Options, Commodities, Derivatives and Structured Products, Life Settlements and Premium Finance.
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PW-MAG.COM NEWS | VIDEOS | EVENTS | EXPERT VIEWS
Summer 2016 Editorial Director Evan Simonoff evan@pw-mag.com Executive Director Russ Alan Prince russ@pw-mag.com Managing Editors Raymond Fazzi ray@pw-mag.com Dorothy Hinchcliff dorothy@pw-mag.com Senior Editor Eric Rasmussen eric@pw-mag.com Associate Editors Karen DeMasters karen@pw-mag.com Christopher Robbins chris@pw-mag.com Survey Editor Sherri Scordo sherri@pw-mag.com Contributing Writers Leila Boulton, Caren Chesler, Carol J. Clouse, Maureen Nevin Duffy, Juliette Fairley, Michael S. Fischer, Hannah Shaw Grove, Thomas M. Kostigen, Eric L. Reiner and Eric Uhlfelder
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5th Annual
impact / SRI & ESG investing
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Build your business by helping clients make a difference. September 19 | Sheraton Denver Downtown
Communicating Impact Advisors are failing at properly communicating to clients the benefits of impact investing — even though more than two-thirds of clients ask about the prospects of impact investments. Leading industry experts will share their insights and acumen on ways to gain and retain clients by leveraging the myriad attributes impact investments afford. From prospecting to client meetings and next-generation planning, attendees will amass the knowledgeware and skill set to service clients at a higher level and collaborate for a more prosperous future. Find out how to gain and capture more assets under management with cutting edge market intelligence and sales tactics at this one-day event.
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THE WORLD OF FAMILY offices is garnering extensive and increasing attention. Many of the ultra-wealthy families with single-family offices as well as the senior management of these organizations are very concerned about how to boost value. This covers ensuring robust and efficacious leadership of the single-family office to identify and align the most cost-effective and capable external experts.
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WEBCAST
Sourcing And Working With
Millionaire Investors July 20, 2016 | 2:00-3:30 PM ET Most financial advisors are focusing on investors with between $1 million and $10 million in assets. For many advisors, they are the ideal clients.
This webcast by Russ Alan Prince, a leading authority on the private wealth industry, will explain some of the most effective and powerful ways to source and work with these millionaires. Topics to be covered include: • How to create millionaire client loyalty. • How to get more assets to manage from millionaire clients. • How to provide multiple financial products to millionaire investors. • How to motivate millionaire investors to refer their peers. • How to work with centers of influence to obtain new millionaire clients.
For financial advisors interested in building a highly profitable book of business with millionaire investors, this webcast provides key insights and actionable strategies that can translate into new and expanded business. CE Approved This webcast will not be recorded.
REGISTER AT: www.fa-mag.com/PrinceWebcastJuly20
Directed by
RUSS ALAN PRINCE
Executive Director, Private Wealth Magazine
Registration: $29.95 *Each attendee will receive a copy of: Cultivating The Middle-Class Millionaire: How Financial Advisors Are Failing Their Wealthy Clients And What They Can Do About It Maximizing Personal Wealth: An Advanced Planning Primer For Successful Business Owners
editor’s note RAYMOND FAZZI
This ‘Uncertainty’ Is Not A Cliché As a financial journalist, I tread carefully whenever I’m forced to write about financial and economic “uncertainty.” Yes, as we all know, investors hate uncertainty, but it’s hard for the topic not to sound trite. After all, what is certain in life, let alone the economy and markets? However, we would be remiss not to talk about the potential impact of the Panama Papers, which have had the wealth management world on edge since they were leaked to the world—and tax authorities—earlier this year.
It’s virtually assured that the full impact of the Panama Papers leak has yet to be felt in the wealth management business. The scope of the revelations into the private lives of the world’s richest people may be unprecedented. Through millions of documents, including private e-mails, bank records and personal account documents, the leak paints a picture of wealthy families across the globe secretly moving their fortunes in an effort to evade taxes. These include 2,400 U.S. clients, for whom Mossack Fonseca, the Panama-based law firm from which the documents were taken, set up more than 10 | private wealth magazine | Summer 2016
2,800 companies in the British Virgin Islands, Panama, the Seychelles and other jurisdictions that specialize in helping hide wealth, according to a The New York Times. The Times notes that many of the transactions were legal. But that doesn’t mean all these clients are in the clear. The U.S. Justice Department has already said it is scrutinizing the documents for potential prosecutions, while the Times reports that the efforts to hide money were sometimes so transparent that some experts feel legal action is inevitable. Whatever the outcome, it’s virtually assured that the full impact of the Panama Papers leak has yet to be felt in the wealth management business, where planners have always had to walk a fine line between clients’ legitimate rights to privacy and the law. As wealth managers, especially those serving the ultrawealthy, take a hard look at their tax management practices of both the past and future with the Panama Papers in mind, this issue of Private Wealth takes a look at a related matter: How should planners serve foreigners looking to move—and sometimes hide—assets in the U.S.? The story by Carol J. Clouse notes that some states, such as Nevada, Wyoming and South Dakota, have some experts referring to the U.S. as the “New Switzerland” because of the privacy afforded citizens in their banking laws. These laws, in addition to cuts in estate planning taxes and the U.S. quality of life, have made the nation attractive to wealthy foreigners looking to resettle. In our cover story, Eric L. Reiner checks in on Atlantic Trust Private Wealth Management and how they’ve evolved since being acquired by Canadian Imperial Bank of Commerce (CIBC) two years ago. Atlantic Trust’s answer: Very well, thank you. CIBC bought the firm to gain a foothold in the U.S. high-net-worth wealth management market. That foot is now at $27 billion in client assets, up from $24 billion when the deal was consummated. For our third feature, Thomas M. Kostigen reports on how the Rockefeller Foundation, one of the pioneers of impact investing, is participating in an effort to attack climate change—part of a global effort to close what the United Nations calls a $25 trillion gap in funding for curing the world’s social and environmental ills. E-mail me at rfazzi@fa-mag.com with your opinion. www.pw-mag.com
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distribution percentages.) The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its 3-, 5- and 10-year (if applicable) Morningstar Rating metrics. © 2016 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. AB Concentrated Growth Fund was rated 3, 5 and 4 stars against 1,524, 1,315 and 937 funds in the category for the 3-, 5- and 10-year periods, respectively. AB Global Bond Fund was rated 4, 4 and 5 stars against 320, 242 and 147 funds in the category for the 3-, 5- and 10-year periods, respectively. AB High Income Fund was rated 4 stars against 231 and 169 funds in the category, for the 3- and 5-year periods, respectively. AB High Income Municipal Portfolio was rated 4 and 5 stars against 167 and 149 funds in the category, for the 3- and 5-year periods, respectively.
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AB Intermediate Diversified Municipal Portfolio was rated 5 stars among 189, 172 and 116 funds in the category for the 3-, 5- and 10-year periods, respectively. AB Large Cap Growth Fund was rated 5 stars against 1,524, 1,315 and 937 funds in the category for the 3-, 5- and 10-year periods, respectively. AB Limited Duration High Income Portfolio was rated 4 stars among 646 funds in the category for the 3-year period. AB National Portfolio was rated 5 stars against 306, 253 and 174 funds in the category for the 3-, 5- and 10-year periods, respectively. AB Select US Long/Short Portfolio was rated 4 stars against 202 funds in the category for the 3-year period. AllianceBernstein Investments, Inc. (ABI) is the distributor of the AB family of mutual funds. ABI is a member of FINRA and is an affiliate of AllianceBernstein L.P., the manager of the funds. The [A/B] logo and Ahead of Tomorrow slogan are service marks of AllianceBernstein and AllianceBernstein® is a registered trademark used by permission of the owner, AllianceBernstein L.P. © 2016 AllianceBernstein L.P.
5/6/16 10:23 AM
News More Tortoise Than Hare In U.S. Wealthy
Most multimillionaires in the U.S. have a middle-class background and built their wealth gradually through hard work and buy-and-hold investing, according to the 2016 U.S. Trust “Insights on Wealth and Worth” survey. The wealthy are a diverse group of people who nevertheless have a lot in common, according to the survey of 684 people with at least $3 million in investable assets. “Perceptions of the wealthy in history and popular culture have been painted with a broad brush that doesn’t reflect the majority of financially successful people in society,” said Keith Banks, president of U.S. Trust. The wealthy are an “increasingly diverse group of men and women of all ages and backgrounds. Their advantage in life is not rare financial privilege, but rather basic values, discipline and sense of potential shaped by family from an early age, which equipped them to make the most of every opportunity,” he said. According to the survey, which was equally divided among people with $3 million to $5 million, $5 million to $10 million and more than $10 million, 77% came from middle class or lower backgrounds, including 19% who grew up poor. They earned wealth over time, most of it through income from work and investing. Eighty-six percent made their biggest investment gains through longterm buy-and-hold strategies, traditional stocks and bonds (89%) and a series of small wins (83%) rather than taking big investment risks. Almost 60% of high-net-worth individuals keep more than 10% of their investment portfolios in cash positions and 20% have more than one-fourth of their money in cash, partly so they can
invest in sudden market ups or downs. A strong tradition of family values and a desire to give back to the community through philanthropy are two traits that were evident across generations and across levels of wealth, the survey showed. “The one common thread that cut across all generations was the importance and impact of family values as key contributors to success,” said Chris Heilmann, chief fiduciary executive of U.S. Trust. —Karen DeMasters Impact Investors See Food, Agriculture As Top Causes
Feeding the world’s nearly 7.5 billion people while minimizing damage to the environment ranks as the challenge impact investors are most likely to pour money into this year, with roughly one-third planning to increase their allocations to food and agriculture, according to a survey by the Global Impact Investing Network (GIIN). Other areas where impact investors—who seek to solve social and environmental problems while turning a profit—see increasing opportunities include clean energy and health care. The regions they’ll be giving the biggest boost in capital to are sub-Sahara Africa and East and Southeast Asia. “These investors consider impact investing to be a powerful tool when it comes to furthering economic development in emerging markets, where basic services like food and agriculture are a critical need,” said Abhilash Mudaliar, GIIN research director. “When you look at some of the other sectors highlighted, such as education, health care, energy, these are all critical basic services that can drive improved socioeconomic outcomes in these regions. And food and agriculture in particular play a critical role in livelihood support, given
the high proportion of people in these markets that derive their income from agriculture.” The network surveyed 157 investors managing $77 billion in impact assets and found that nearly 80% intend to maintain or increase their commitments in 2016. That translates to a 16% jump in capital committed—to a planned $17.7 billion this year from $15.2 billion in 2015—across various sectors, geographies and asset classes. The bulk of 2015 investments, $7.2 billion, came from asset managers, who said they invested primarily on behalf of family offices and foundations. Direct investments from foundations, banks, development finance institutions, family offices, pension funds and insurance companies made up the rest. In all, these investors committed capital to 7,551 deals in 2015 and plan to commit to 11,722 deals in 2016. The survey results do not represent the entire global impact investment market, which is difficult to measure, but they do give some indication of its growing strength. Interest in the discipline is increasing largely because of changing attitudes—the realization that governments and philanthropy can’t solve today’s megaproblems alone and that, in fact, there is money to be made in solving them. Survey respondents expected an average gross return for debt of 5.4% in developed markets and 8.6% in emerging markets. On the equity side, they expected an average gross return of 9.5% in developed markets and 15.1% in emerging markets. The vast majority, 89%, reported that their investments have performed either in line with or above financial expectations, while nearly all reported impact performance in line with or better than expectations. —Carol J. Clouse
12 | private wealth magazine | summer 2016 www.pw-mag.com
Family wealth continuity David Lansky
Time And Tide: The Legacy Dream “ Things ain’t what they used to be and never were.” —Will Rogers Many wealth creators and business owners share the dream of perpetuating family relationships and family wealth for many generations to come. That’s no easy task. Despite numerous structures, plans and processes designed to ensure the sustainability of a family’s wealth, many estate plans and business succession plans fail to achieve a family’s desired outcomes. So in this inaugural column of an ongoing series, we will address the myriad factors that play into successfully maintaining wealth across generations. We define “family wealth continuity” as success at preserving both a family’s material assets—such as a family business, a family foundation or other financial assets—and good family relationships. It is certainly possible to create structures that are likely with a high degree of probability to preserve assets over time—they can be locked up in trusts, family involvement can be minimized and long-term growth can be emphasized without regard for shortterm benefits to family members. This approach may be good for the assets, but it’s probably not good for the family—they may see no purpose in spending time together, they may lose “positive feelings” about their legacy and, indeed, they may even come to resent it. On the other hand, families might do everything
necessary to ensure peace and harmony among family members and to secure good relationships across generations, but an emphasis on “peace at all costs” can prevent relevant matters from being discussed openly, leading to a breakdown of both wealth continuity plans and family relationships. Our intention in this and subsequent columns is to draw from our professional experience, available research and other resources to explore and advise on the best approaches for families, wealth creators and their advisors who wish to preserve family assets and good family relationships for future generations. A Case Study
An entrepreneur in his late 60s approached one of us some time ago, requesting our advice on establishing a family office. He and his sister had inherited significant wealth from their parents and he was intent on keeping their money invested and growing
together and on securing the entire family as active partners. He viewed a family office as a vehicle for achieving both goals. Moreover, he thought his 35-year-old son would be a natural leader of the family office. We then had a discussion with him about his plans for his son: “This sounds like a good idea. What is your son doing now?” “Well, he’s unemployed. But he’s studying for his MBA.” “Oh. How much longer until he graduates?” “Well he hasn’t quite started yet.” “What does your sister think of this plan?” “I’m not sure.” “Why not?” “Well we had an argument a year ago and we haven’t spoken since.” Preserving family and wealth across generations must start with a dream—a dream of continuity. But that dream must not be a fantasy—it must be rooted in reality. This entrepreneur we Continued on page 57
Summer 2016 | private wealth magazine | 13
SFOs Ante Up On Private Equity
Wealthy families like the sector’s performance, and they often have expertise to offer for the businesses they invest in. By Hannah Shaw Grove
M
any highly affluent
families created their original wealth from private investments, so it’s no surprise that research we recently undertook at iCapital Network reveals that single-family offices have a notably high predilection for private equity assets, particularly private equity funds. Six out of 10 single-family offices are investing in private equity, with 90% allocating 10% or more of their investment portfolios to PE funds or direct investments, according to iCapital Network research. Breaking that down further, a little more than 70% allocate between 10% and 20% to private equity, while 20% maintain allocations of 20% or more. That kind of appetite is consistent with the target allocations of many institutional investors. Most striking is that close to 9% are allocating more than 50% of their portfolio to private investments. An ultrawealthy family has the autonomy to invest in the ways that best suit long-term goals. The relatively high allocations to private equity parallel the approach used by many large endowments to attempt to manage downside risk and increase return potential over extended periods of time. The high allocations may also rep-
resent something else: a very high level of comfort with the asset class. Entrepreneurial DNA
Families at the center of a family office may have this higher level of comfort with private equity because their family’s capital was created by a successful private business in the first place
14 | private wealth magazine | summer 2016
or their approach to making money is to acquire, fix and build assets and businesses in certain industries. With that experience can come a certain level of confidence in vetting and understanding direct investments and in the idea of investments in private equity funds more generally. Private equity investments leverage and reinforce that www.pw-mag.com
b u s in e s s Ma n a g e m e n t
background by giving the family opportunities to add value and industry expertise to companies and funds that they choose to partner with. Many wealthy families can afford to take a longer-term investment approach. They understand that the potential premium for illiquidity comes from allowing companies to pursue strategies that often require four to six years to execute. These families also appreciate the active role that fund managers play, working closely with their portfolio companies to achieve their goals. Such alignment and consistent engagement typically do not exist in the public markets. Our research on single-family office investments in private equity identified three additional motivations that propel single-family offices toward this asset class: Potentially superior investment returns: A large percentage of single-family offices say they have achieved strong performance with their private equity investments, especially in contrast to other vehicles and asset classes. Performance is the most influential factor in why private equity is viewed so favorably by single-family office investors. While the typical single-family office is historically sensitive to fees, it is also highly attuned to performance and always looking for superior investment returns. U.S. private equity funds have produced net returns of 11.8%, 10.5% and 13.2% over the last 10, 15 and 20 years, respectively, as of September 30, according to Cambridge Associates. Seven out of 10 single-family offices investing in private equity reported they had better returns from private equity than from their traditional portfolios of stocks, bonds, equity and fixed-income mutual funds and separate accounts, ETFs and other indexed vehicles, according to iCapital research. Family involvement: A somewhat distant second factor is the opportunity for family members to take a hands-on investment role. This pertains almost exclusively to direct investments, and there are times when the family can provide valuable insights and leadership drawn from their own experiences as business owners. Again, it’s speaking
to the entrepreneurial genes that often reside within ultra-wealthy families. Negotiating power: A relatively small percentage of single-family offices cite preferential terms as a meaningful benefit of investing in all forms of private equity. This is often the result of working in conjunction with another family office to source investments and pooling assets to maximize their negotiating position. It’s worth noting that proportionately few single-family offices operate in this way, but
pra ct i ce d eve l o p m e n t
that is likely to change as these organizations become increasingly professionalized. Looking Ahead
While past performance is not indicative of future results, it does seem to be an enticement for future commitments, with allocations to private equity from current and first-time investors expected to increase, according to our research. Of the single-family offices currently Continued on page 56
Clarity
Clarity
Excellence in Private Care Excellence in Private Care
summer 2016 | private wealth magazine | 15
16 | private wealth magazine | summer 2016
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F E AT U R E | CO V E R STO RY
A PERFECT UNION A FEW YEARS AGO, ATLANTIC TRUST PRIVATE WEALTH
Management set out to find the right long-term partner. As it turned out, word of that search spread from the firm’s Atlanta headquarters all the way up to Toronto, home of the Canadian Imperial Bank of Commerce (CIBC), which was successful in its domestic wealth market and had its sights on entrée to the far larger U.S. high-net-worth space. “We wanted to create a platform to arrive in the U.S. and then to expand,” recalls Steve Geist, a CIBC senior executive vice-president and its group head of wealth management. “The U.S. wealth market is quite fragmented, so there is an opportunity for entry and for growth.” Atlantic Trust had appeal on several fronts, he says. “Atlantic Trust was highly regarded, they deliver strong results for their clients from an investment perspective, clients were bringing them more money to manage and more clients were arriving,” Geist says. But hasn’t many a business combination killed the goose that laid the golden egg? This particular union would be a cross-border undertaking, adding to the risk. Today, Atlantic Trust is a unit of CIBC and the wealth management firm’s chairman and CEO, John “Jack” S. Markwalter Jr., couldn’t be happier. “It’s almost like it was meant to be,” he enthuses about becoming part of CIBC (NYSE: CM), a perennial name on Bloomberg’s yearly list of the world’s most financially sound banks. It’s easy to understand his excitement. Atlantic Trust manages nearly $27 billion, up from $24 billion since the acquisition closed in early 2014. Offices have been added in West Palm Beach, Fla., and Wilmington, Del., bringing the total to 13. The firm’s footprint in Boston, Atlanta and Newport Beach, Calif., has recently expanded. And head count is up, with some new team members coming from the competition. PHOTOGRAPHS BY CHRISTOPHER HAMILTON
CLIENTS MAY HAVE BEEN THE REAL WINNERS WHEN ATLANTIC TRUST PRIVATE WEALTH MANAGEMENT WAS ACQUIRED BY CIBC.
By Eric L. Reiner
SUMMER 2016 | PRIVATE WEALTH MAGAZINE | 17
Fairy tale endings don’t happen by accident in the hardnosed wealth management business. This is the story of a flourishing firm that went hunting for more than just a new owner. It thirsted for a partner to share its vision, values and yen to grow, and the best way to find that, Markwalter’s executive team concluded, was to begin the search with a short list of qualities treasured in a potential buyer. These desired characteristics were consonant with how Atlantic Trust ran—and aimed to continue to run—its business, which in turn stemmed from its roots. From Three firms to One Atlantic Trust is the scion of three yesteryear organizations: Whitehall Asset Management, Stein Roe Investment Counsel and Pell Rudman. The Atlantic Trust name was born after Invesco bought Pell Rudman in 2001. By 2004, the other two firms had been acquired and assimilated. “What we tried to do is take the best attributes of each organization and combine them,” says Markwalter, who has helmed Atlantic Trust the last dozen years. In the firm’s playbook you’ll find Pell Rudman’s penchant for holistically integrating clients’ investments and wealth planning, along with its appetite for quarterbacking their financial team. The commitment to excellence in both investment management and client service that came from Stein Roe and Whitehall now finds expression in Markwalter’s vision for Atlantic Trust.
David L. Donabedian, CFA Chief Investment Officer
“We want to be the go-to wealth management firm for both clients and professionals, and in my mind the only way you can do that is to be the highest quality firm in the industry. Then clients stay with you, they add assets, they refer you to their friends and family, and their attorneys and accountants refer you,” says the 30-year industry veteran. Aspiring to best-in-class status is certainly a lofty goal, but make no mistake: Under the leadership of the tall, charismatic 18 | private wealth magazine | summer 2016
Harvard MBA from Georgia who’s known for greeting people with a welcoming smile and hearty handshake, Atlantic Trust has posted some enviable numbers. Thirty-six consecutive quarters of increases in assets managed—all of it organic growth rather than through acquisitions. Atlantic Trust is the number one wealth management firm ultra-high-net-worth clients would recommend, according to a 2014 Luxury Institute survey. It has a 98% client retention rate for the year that ended March 31. What these accomplishments reflect, of course, is the firm’s culture. That ineffable intangible has always been central to success at Atlantic Trust. For a sense of the firm’s core values, listen to what Markwalter has to say about the Department of Labor’s new fiduciary rule, which some in the financial industry (and on Capitol Hill) are fighting. “Being a fiduciary is not new to us. Frankly, it’s something that we’ve practiced since inception because we think the best way to take care of families and their wealth is to put their interests first,” Markwalter says. Atlantic Trust thus sought in new ownership, first and foremost, an organization that would continue its fiduciary ideals and culture. “And we found it with CIBC,” Markwalter says. The feeling was mutual, according to CIBC’s Geist. “We were probably not 90 minutes into our first discussion with Atlantic Trust senior leaders before we knew we had an alignment in terms of cultural fit. It was very obvious to us that they were truly client-focused,” Geist says. A Peek Behind The Curtain Atlantic Trust’s unwavering dedication to clients can be viewed through the keyhole to the office of Paulina Mejia, head of the firm’s Wealth Strategies Group. From the 42nd floor of the Atlantic Trust office in midtown Manhattan, she oversees the group as it works to holistically mesh clients’ investments with their tax, wealth transfer and other plans. She and most of the professionals on her team are trusts and estates attorneys who no longer practice but who have substantial wealth-planning expertise. “We help our clients think through strategies given their overall asset picture, but we don’t actually draft the documents and put them in place,” Mejia explains, noting that the group’s wealth-planning services are included in the investment management fee clients pay. “We work with the clients’ lawyers and accountants, who play an integral role in the creation of the plan as well, and ultimately they implement the plans.” Something her team noticed a while back is that families whose wealth transferred smoothly to the next generation had a healthy culture in their families when it came to money. “They’re able to talk about their wealth in a natural, comfortable way and share ideas of what it means,” she says. That often was not the case in families where the transfer faltered, no matter how technically sound the plan in place was. “Engaging the next generation is hugely important in being successful in the transition of wealth,” Mejia says. www.pw-mag.com
F e at u r e | Co v e r Sto ry
Invigorated with this awareness, Atlantic Trust set out to foster intergenerational involvement in its client families. Their first step, of course, is that they begin communicating about their wealth. If they don’t, heirs might never know their parents’ reasons for leaving assets to them in trust rather than outright, or for bequeathing unequal amounts to siblings, for example. “People get hurt when they’re blindsided. If you’re in this business you must recognize the human element to it,” Mejia says. To Atlantic Trust, this meant the firm’s relationship professionals, as well as Mejia’s group, who also interface with clients, needed to learn how to identify opportunities for family money conversations. “This wasn’t to train our people to be therapists, but to be able to spot issues and get to things before they become uncomfortable. We want to make sure that not only is our clients’ money protected and growing, but that it’s also transferred in the way they want,” Mejia says. Atlantic Trust facilitates further money talk with programs such as G2G (Generation to Generation) Impact. Its luncheons and after-hours events help the rising generation prepare to manage their wealth, while family summits, such as the one held at the United Nations in New York in 2014, bring the generations together for discussions about legacy shaping and the family’s long-term plans for community involvement. “It’s all part of this recognition that we need to engage in activities which promote families openly sharing ideas about what the future of their legacy and wealth means, and hopefully learn and have fun while doing it,” Mejia says. The Investment Side Of The House Atlantic Trust’s second requirement of a would-be partner was that it accommodate the firm’s investment platform, a combination of seven proprietary strategies and about 100 outside money managers. As it turned out, CIBC had a long history of using open architecture, so this was not an issue. For clients, the benefit of using both in-house and outside managers is “we can build a diversified portfolio to include almost any asset class you can imagine,” says David L. Donabedian, the firm’s chief investment officer, at the firm’s Baltimore office. The expansive palette even includes private equity, something about one in five Atlantic Trust clients pursues. “Typically, somebody investing in a private equity fund is going to have a net worth of $10 million or more—although there are exceptions—have a growth investment objective and be in a position to lock up capital for eight to 12 years. You’re making a longterm investment in exchange for a return premium over what the public markets have to offer,” Donabedian says. When it comes to asset allocation, forget set-it-and-forget-it. “That’s really not in sync with the times,” he says. “In a world with global linkages, there are both more opportunities and more risks out there, so it’s important to be nimble. Probably two to four times a year we see something where, with a 12- to
John S. Markwalter Jr. Chairman and Chief Executive Officer
18-month view, we think there’s an opportunity to either make some incremental returns or reduce portfolio risk.” As one example of such a move, in late 2014 the firm’s 11-member asset allocation committee, which Donabedian chairs, decided to shift out of corporate high-yield bonds and into municipal junk. “We saw that the market wasn’t really accounting for, or pricing in, slowly deteriorating credit conditions in corporate America,” he says. So far, the tactical swap has worked out. Last year, corporate high-yield debt fell more than 4.5%, while his high-yield munis returned over 5.0%. Currently, Donabedian is underweight bonds and overweight equities with a conservative bias favoring U.S. large-cap and the developed international markets. Emerging markets exposure is now minimal and the same is true for its correlate, commodities, after three years of scaling back. Regarding outside manager selection, size matters to Donabedian in two ways. First, he says, “all the academic research shows that small and mid-sized asset managers perform better than larger firms, whether you’re looking at equities or fixed-income or hedge funds.” But whether it’s feasible to bring a boutique manager onto a firm’s investment platform is a function of that firm’s size. If it has too many large clients, their assets could drown the boutique manager and wreak havoc with its investment strategy. “We’re good-sized, but we’re not a mega-firm,” Donabedian says, “and we think that’s an advantage because it lets us bring boutique managers onto our platform.” Deep Pockets Arrive Lastly, Atlantic Trust wanted new ownership that would invest in it, especially in the areas of technology and personnel. Employees are an integral part of the firm’s precious cultural fabric, according to Markwalter. Continued on page 58
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F e at u r e | Es tat e p l an n i n g
Death and Taxes For Wealthy Foreigners Rich immigrants are streaming into the U.S. and they’re bringing lots of assets and estate planning needs with them. By Carol J. Clouse
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summer 2016 | private wealth magazine | 21
M
Featu r e | Estat e pla nn in g
y Spanish in-laws are not
wealthy, unfortunately. But if they were and they wished to leave assets to my husband or our daughter, they would be part of a burgeoning group: rich foreign nationals planning for the futures of their children and grandchildren in the United States. Call it another stream in the flood of foreign money hitting the U.S, along with the cash and real estate investments of wealthy foreigners that are flowing here because of an ironic twist: The U.S. has become one of the world’s favored tax havens. Moreover, foreign family money is pouring in at a time when changes to U.S. tax law have all but eliminated estate transfer taxes, making the income tax aspect of estate planning the primary issue for the vast majority of wealthy families. Strategies for the growing number of multinational family trusts and income tax strategies for estate planning in general, for example, were two of the most talked about themes at the recent Heckerling Institute on Estate Planning conference in Orlando, Fla. “There was a whole international track at Heckerling this year. Five years ago that would have been unheard of,” says Suzanne Shier, chief wealth planning and tax strategist at Northern Trust, who spoke at the conference, along with the other tax attorneys and financial advisors interviewed for this story. The change reflects increasing relevance within the industry. “Ten years ago we pretty much assumed our trusts were domestic,” Shier says. “We can’t make that assumption now.”
Not Born In The U.S.A. A dramatic rise in the number of rich immigrants entering the U.S. is driving the demand for multinational estate planning, including a decade-long surge of professionals and entrepreneurs coming to the U.S. to live and work. But more interesting is the increasing number of wealthy families in other parts of the world who covet an American education for their children—who go to school here and often end up staying. “There are a lot of people, particularly from Asia, who have made their wealth in the last couple of decades and are sending their children here for college or even high school. And, not surprisingly, those children end up falling in love with an American and marrying them,” says Rachel Harris, chair of international trust and estate planning at Loeb & Loeb in Los Angeles. “There’s a lot of this happening. … People engage in all kinds of good tax planning and then somebody in their family goes and marries an American and suddenly they have U.S. citizen grandchildren and all their structures have to be looked at again because they no longer make sense.” Indeed, the number of international students attending U.S. colleges and universities for the 2014-15 academic year increased by 10% to a record high of nearly 975,000, the highest growth rate in 35 years, according to a November report by the Institute of International Education. China remained the top country of origin, climbing by 11% to more than 300,000 22 | private wealth magazine | summer 2016
students. India’s growth outpaced China’s, jumping by nearly 30% to a record high of more than 130,000 students. There were also large increases in the number of students from Brazil, Kuwait and Saudi Arabia. While there is an onerous income-tax system for the U.S. beneficiaries of most foreign trusts, the exception to that is trusts created by non-resident aliens for the benefit of U.S. beneficiaries. The foreign grantor trust is one where the grantor retains certain powers, such as the right to revoke or amend the trust or the power to direct income and/or principal distributions. Grantor trusts are treated as flow-through entities for tax purposes, with all income and deductions attributed to the grantor, regardless of whether he or she receives distributions. This enables the trust to grow tax-free, with any distributions to beneficiaries tax-free as well. “If Chinese parents, for example, create a trust purely for the benefit of their U.S. children, but they are allowed to terminate the trust and take the money back anytime they wish to, then even though there’s tons and tons of income, and even though normally when you make a distribution it’s counted as income, it’s just an exception—you get it tax free,” says Joshua Rubenstein, national head of the trusts and estates practice at Katten Muchin Rosenman in New York. “It’s basically a purposeful loophole to encourage foreign people to send money into the states. Then, once the kids get it, they put it in their bank accounts and start paying income taxes on the income.” The New Switzerland Minimizing income taxes has become an international obsession due to increased tax enforcement and reporting. In 2014, the Organization for Economic Co-operation and Development (OECD) adopted common reporting standards, basically its own version of the U.S. Foreign Account Tax Compliance Act. Better known as FATCA, the act has required non-U.S. financial institutions to report U.S. assets kept overseas since 2010. “What’s interesting is that the [OECD] disclosure obligations are even more detailed than the requirements under FATCA,” says Northern Trust’s Shier. “The big picture is that there is much more transparency.” Ironically enough—and infuriating to foreign bankers—this transparency has led to the U.S. playing the role of Switzerland. The U.S. has resisted the new global disclosure standards and the land of the free is fast becoming the go-to place to stash foreign wealth. A recent story by Bloomberg News notes that shifting money from offshore secrecy havens to the U.S. has become a brisk business, with the world’s rich moving accounts from places such as the Bahamas and the British Virgin Islands to Nevada, Wyoming and South Dakota. “A lot of the rest of the world is accusing the U.S., after having beaten everybody up with FATCA, of now being the world’s biggest tax haven,” Rubenstein says. Apparently, it’s not simply an accusation. The U.S. now ranks third in the financial secrecy index, produced every two years by the Tax Justice Network, overtaking Singapore, www.pw-mag.com
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possible, is die with only highly appreciated assets,” Lee says. “So you can get a free step-up and your beneficiaries can sell without having to pay a lot of capital gains tax.” Tax Planning For The 99.8% The only strategy for changing the basis of assets, maxiMeanwhile, FATCA has persuaded many wealthy mizing the step-up and deferring and shifting tax items is the Americans to bring their money back home, where U.S. use of partnerships, says Lee. General partnerships, limited taxpayers are today navigating a system where the estate tax partnerships and limited liability companies are all considered affects very few, making income tax management the key to pass-through entities and taxed as partnerships. “Partnerships most estate planning. are the only vehicle out there that allow you to manipulate Since 2013, when the American Taxpayer Relief Act (ATRA) basis or disproportionately allocate tax items in one direction and its $5.25 million federal estate tax exemption (increased to or another, and that allows different people to have different $5.45 million for 2016) went into effect, very few families have economic interest in the underlying assets,” Lee says. been subject to the tax—99.8% of estates owe no estate tax at all, For example, the estate planning world knows what to do according to the U.S. Congress Joint Committee on Taxation, with a client who has two assets, where one has zero basis and which means that basically only two out of every 1,000 estates the other has high basis. You arrange for the client to keep have to pay. For the overwhelming majority of wealthy families, a the lower basis investment until she passes away and try to couple can exclude $10.9 milget the high-basis investment lion from estate or gift taxes out of the estate because it and with smart planning— provides no benefit from the putting assets into an irrevostep-up. The problem is that cable trust, for example—pass this strategy only works with on many times that amount very high and very low-basis tax-free to the next generation. assets. What do you do if a Additionally, the estate tax for client has two assets and both those few who do have to pay of them are 50% over basis? was reduced to 40% from 55%, According to Lee, you can use and most states have gotten a partnership to take the basis rid of their death taxes. At the off of one asset and move it to same time, income tax rates for the other asset, so you end up those in the highest tax bracket with one at 100% and one at increased, including the bump zero. The only way you can to 20% from 15% on long-term do that is by comingling the —Northern Trust’s Paul Lee capital gains and the introducassets in a partnership, letting tion of the Net Investment them sit there for seven years Income Tax (NIIT), which added another 3.8% on top of all or more and then making the right distributions and elections other income. at the right time to shift the basis from one asset to the other. “So the conversation has changed to focus on income tax planning and the significant income tax savings you can get when Estate Planning In Three-Part Harmony you pass away and get a step-up in basis,” says Paul Lee, senior Mark Parthemer, managing director and senior fiduciary regional wealth advisor with Northern Trust’s New York office. counsel at Bessemer Trust in Palm Beach, Fla., adds that “Basis” is what a person paid for the asset and a capital gain financial advisors should look at estate planning as three parts or loss is the difference between the basis and the amount the working together, like a three-part harmony. person gets when he sells an asset. In other words, if you sell First, the trust needs to be properly structured; second, there an asset that is worth more than you paid for it, you will have needs to be a thoughtful use of entities complementing the to pay taxes on the gain. But while capital gains taxes can be trust structure, such as limited partnerships and limited liability significant, this tax can be avoided if the person’s heirs inherit companies; and third, there needs to be proper asset allocation. the asset. When someone inherits an asset, the cost basis of the “Without eliminating or reducing a client’s overall diversiasset is “stepped up to value” on the date of death. fication … you can create different allocations within different For example, say an elderly parent leaves a home to his trusts and individual accounts,” Parthemer says. “You still have children, which is valued at $750,000 on the date he passes global diversification, but you have more focused, more approaway. Because the property was purchased 20 years ago for, priate allocations in particular pockets.” say, $250,000, the cost basis is only that: $250,000. So the Some of the income taxes can be managed through portfobeneficiaries will not be responsible for capital gains tax on lios that have lower turnover or less income, he says. Private $500,000 worth of gains. placement life insurance and private placement annuities that “In a simplistic sense, what you should try to do, if at all Continued on page 59
“In a simplistic sense, what you should try to do, if at all possible, is die with only highly appreciated assets.”
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F e at u r e | I mpa ct In v e sti n g
Viewpoint
Filling The Climate Gap The Rockefeller Foundation is trying to help fill a $2.5 trillion gap in the drive for a healthier world. By Thomas M. Kostigen
summer 2016 | private wealth magazine | 27
T
he world has become too mired in environmental problems to ignore treating its symptoms. Investments in environmental cause management—mitigation, conservation and preservation strategies— have manifest in an entirely new, multibillion-dollar investment sector: clean tech. But what of the disastrous results already begotten by excess carbon emissions, land degradation, waste proliferation and the like? Those are symptoms. Prodigious investments are needed. And the Rockefeller Foundation is promulgating such adaptation and resiliency financing under a new, innovative portfolio of opportunities. Until now, identifying opportunities, eliciting sophisticated investment criteria and utilizing the right financial mechanisms and peer group analysis have been rather sketchy propositions: too little supply, too little demand, a lot of both—and awkward means to effectively balance the equation. Enter the foundation’s Zero Gap, a series of new investment initiatives operating under one umbrella and whose activities began last year. Saadia Madsbjerg, the foundation’s managing director, is leading the charge. “At Zero Gap, what we do is fund the early stage design and testing of mechanisms that in one way or another have the potential either to attract more money from the private sector to the development space—or to take that money that is already deployed and deploy it in more efficiently,” she says. The mechanisms employed include everything from insurance-related products to securitized debt products to micro-finance vehicles. The benefits of impact investment conduits such as these include creating less friction, which of course boosts capital flows and makes markets run more smoothly, Madsbjerg says. In turn, environmental and social challenges more easily get sustainable funding. Conduits are important when markets are being created. They make sure capital gets from point A to point B and back again—from the investor to the investment target, with the return to the investor. In a perfect world they operate without much noise: no wobbly transfer issues, custodian issues, accounting problems, portfolio monitoring, etc. Since the Rockefeller Foundation was instrumental in creating the impact investment market about eight years ago, it makes sense that it would employ more mature vehicles to address growing industry needs. Impact investing assets under management have grown to about $60 billion since inception. “Capacity building facilities needed to be in place for that field to grow ... and that is a very important piece of the equation. But of course the need for more capital for social, environmental and economic challenges extend way beyond what that work was designed to do. And that leads us to the work that we have called Zero Gap,” Madsbjerg says. All told, a funding gap of about $2.5 trillion needs to be filled to achieve the sustainable development goals (SDGs) in developing countries alone, according to Rockefeller Foundation
28 | private wealth magazine | summer 2016
research. That number comes from subtracting the $1.4 trillion that public and private funding cover annually from the $3.9 trillion the United Nations estimates is needed per year to keep the world on a sustainable course. The figure encompasses 17 development goals the U.N. hopes to achieve over the next 15 years to make the world a better place, including ending poverty and hunger; protecting the planet from environmental degradation; economic equality measures for all persons; fostering peace; and promulgating global partnerships between the public and private sectors. These mission areas are further broken down into specifics such as quality education, gender equality, affordable and clean energy, clean water and sanitation, responsible consumption, decent work and economic growth and climate action, among other targets. So how does the gap get filled? The Zero Gap initiative, as its name suggests, aims to answer the question. Through a series of programs, Zero Gap is laying the groundwork for others to enlist in the battle for planetary health and human well-being. Here are some examples of the investment tools it is sharpening: ■ The Extreme Climate Facility, an effort led by African leaders, is an insurance instrument that helps that continent’s countries most impacted by climate change. It funds adaptation and resilience measures that are designed to safeguard vulnerable populations against the effects of extreme climate events. This also promotes economic growth. The ECF is looking to issue more than $1 billion in catastrophe risk coverage over the next 30 years. ■ The U.N.’s Land Degradation Neutrality Fund is an investment fund designed to encourage the rehabilitation of degraded lands worldwide. Such rehab efforts can reduce poverty, diversify income, mitigate climate change and create new employment opportunities. The fund is offering equity and quasi-equity, subordinated debt, guarantees and syndicated loans to generate $50 billion over 25 years. ■ The Forest Resilience Impact Bond is a pay-for-performance mechanism, a la a social impact bond, that could help the U.S. Forest Service realign its $2.5 billion fire prevention and suppression budget and reduce the risk of wildfire and drought. The USFS pays for firefighting with prevention dollars, even though fighting fires costs 40 times more than preventing them. The FRIB will offer private investors a choice of debt or equity tranches and will provide annual cash flow payments, as well as a larger single payment at maturity. Returns are to be paid by utility companies and the USFS, which benefit from improved water yields and savings from reduced wildfire severity. ■ The Forest Foundation Fund is an endowment-based model for halting deforestation and regrowing forests. Overseen by the Center for Global Development, the endowment would be created by sponsor countries using government bonds or public insurance to cover private bank deposits that are advanced to the FFF. The fund has the potential to generate $3.5 billion. www.pw-mag.com
F E AT U R E | I MPA CT IN V E STI N G
By funding the “gap,” the foundation is essentially trying to fill the holes left by cash-strapped governments and charitable institutions that are already stretched thin. “As you know, funding from traditional sources such as governments, multilateral agencies and philanthropy cannot keep pace with the escalating costs of climate change, environmental degradation, health epidemics, climate refugee crises and other roiling issues,” says Zero Gap spokesperson Kavita Tomlinson. In fact, I do know. Having spent a great deal of time in the developing world and perennially investigating the environmental woes facing industrialized countries, I have seen firsthand the ramifications of empty funding proposals. To be sure, the Rockefeller Foundation can fill in some of that empty space. An article published by the website GreenBiz notes that “charities and nonprofit groups have [a
“At Zero Gap, what we do is fund the early-stage design and testing of mechanisms … to attract more money from the private sector.” —Saadia Madsbjerg
long history] of tackling social and technological challenges that fall between the cracks of government and industry action. Philanthropies also can be patient with their grants and measure returns over longer time horizons, as well as pursue cross-border action that can be difficult for national governments to take on alone.” The article, published in March and written by Noah Deich, executive director of the Center for Carbon Removal, and Giana Amador, a research analyst at the center, made the case for foundations being the cure for the underfunded development of climate change solutions. In perhaps the biggest example of this, Bill Gates, through his foundation, and a litany of luminaries, including Amazon’s Jeff Bezos, Virgin’s Richard Branson, Alibaba’s Jack Ma
and Saudi Prince Alwaleed bin Talal, have formed the Breakthough Energy Coalition. Their aim is to invest in technologies that will create a new energy mix. “The Breakthrough Energy Coalition is working together with a growing group of visionary countries who are significantly increasing their public research pipeline through the Mission Innovation initiative to make [clean energy] a reality,” the group explains. It’s a huge deal when more than 20 billionaires join together with countries to invest in a single sector. There is a great deal to admire about Zero Gap and the Breakthrough coalition, both of whose efforts could be world-changing. But the real big deal should be made for hereand-now adaptation and resiliency. There are too many problems facing the world today, even if we must plan for the edge of tomorrow. And while it’s wonderful to imagine a cleaner, greener future, for many people adept mechanisms may come too late. Madsbjerg says the Rockefeller Foundation hasn’t taken it’s eye off the ball and is focused on resiliency at the same time that it is investing in innovative financial models that address prevention. She cites the mission of one program focused on catastrophe financing, where the premise is, “if a natural disaster happens, how can we make the money available very early on?” Other programs trigger payments when evidence of extreme climate change occurs. Zero Gap’s mission is to fund great ideas and enlist others to invest. At base, it’s a venture philanthropy model. This is how it describes itself: “Zero Gap is focused on solutions that can ultimately catalyze largescale capital from institutional investors, as well as households and retail investors. The innovative financing mechanisms currently under exploration range from new debt instruments to raise commercial institutional capital for environmental preservation to micro-levies that raise funds for fighting childhood malnutrition.” Ambitious? You bet. But exigent? Absolutely. At the time of this writing, the White House released a statement linking climate change to increased health risks. Air pollution, extreme heat, infectious diseases and water-related illnesses are at profound levels. All this, not to mention the direct risks associated with natural disasters. The entirety of human well-being is fracturing. Mind the gap. Innovative financing may be our lifeline to the future. SUMMER 2016 | PRIVATE WEALTH MAGAZINE | 29
An Investment To Flip Over
U.S. rare coins provide investors with more than just a chance to own something that once sat in George Washington’s pocket. By michael contursi
P
reserving
wealth
for
future generations has always been a challenging endeavor for the affluent. A seemingly never-ending succession of negative global events has made the market more uncertain and wealth preservation much more challenging. Consequently, effective wealth preservation solutions are in high demand. There is, however, an interesting alternative investment that wealthy investors may be overlooking: the U.S. rare coin market. Once the exclusive province of numismatists and well-heeled collectors, elite coins are experiencing a transformative evolution and emerging as a bona fide alternative asset class, with the quest for diversity helping drive interest in the sector. It’s important to first clearly define the U.S. rare coin market. These are not coins you will find on late-night TV commercials, which typically sell generic gold or silver coins. Moreover, U.S. rare coins have nothing to do with gold or silver bullion, bars or precious metals. And they have no connection to ETFs. Certified U.S. rare coins are tangible, elite assets that provide investors with the opportunity to own a physical piece of American history with enduring value. They occupy the intersection of art, rarity and historical significance as U.S. rare coins memorialize the birth of democracy
and capitalism. They are highly prized collectables and part of a robust, dynamic and orderly, multibillion-dollar market. Wealth Preservation
U.S. rare coins are not a new strategic portfolio option for investors. Wealthy families have used elite collectibles and
30 | private wealth magazine | summer 2016
irreplaceable artifacts to protect and preserve family wealth for many generations. The recent emergence of U.S. rare coins as an alternative asset class illustrates the validity of their role in a historical wealth preservation strategy that has been with us for centuries. U.S. rare coins are elite assets that allow investors to benefit from www.pw-mag.com
in v e sti n g
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the market dynamics of scarcity, exclusivity and robust demand. Investor downside exposure is mitigated by the fact they own hard, tangible assets possessing non-correlated performance characteristics. Scarcity and robust demand are among the drivers of this asset class. No one, for example, can go back to 1907 and strike more ultra-high-relief $20 Saint-Gaudens. Furthermore, the market’s wealthy collectors and investors have long demonstrated a passion for the rare coins they own. They are not prone to selling during times of economic crisis or market turbulence as are panic-stricken equity stock and bond investors. Consequently, the U.S. rare coin market is known for having a stable, non-correlated performance profile. That makes the market an effective alternative asset option for wealth preservation, intergenerational wealth transfer and capital appreciation strategies. Two world-record coin sales conducted during and shortly after the Great Recession demonstrated the resilience of the market: The first U.S. dollar coin, minted in 1794, sold for $7.85 million in 2010, then again in 2013 for $10 million. The Brasher Doubloon, the first gold coin made by George Washington’s neighbor on Cherry Street, sold for $7.4 million in 2012. Estate and Tax Benefits
U.S. rare coins are tax efficient and provide certain advantages over other investments. For example, capital gains associated with the sale of U.S. rare coins can be deferred indefinitely by utilizing the “like-kind” exchange under Section 1031 of the Internal Revenue Code. Rare coins also benefit from a step-up in basis upon the owner’s death. Combining these benefits allows investors to potentially eliminate their capital gains exposure. Unlike stocks, bonds and commodities that have a daily price, the value of exclusive rarities is subjective. This provides great flexibility for estate planning and philanthropic planning. Privacy and Portability
Now more than ever, people value their privacy. But in today’s intrusive
world, the mere concept of privacy seems out of reach. Rare coin investors have been able to maintain a level of privacy by owning tangible assets that fall outside of traditional reporting requirements. U.S. rare coins are a completely self-regulated industry; all transactions are completely private and do not require K-1, 1099 or any other government reporting. This makes U.S. rare coins a good fit for investors who like to “play things close to the vest.” Because of their size, rare coins also give owners the ability to transport large amounts of wealth with ease anywhere in the world. Rare coins are also duty free both in and out of the U.S. and exempt from Foreign Account Tax Compliance Act (FATCA) reporting. Who Is Qualified To Invest?
The most important consideration in determining whether a U.S. rare coin strategy is right for a client is, as with many other investments, the client’s investment goals. Clients looking for long-term wealth preservation, multigenerational wealth transfer and capital appreciation solutions are ideal candidates. For example, clients with shortterm liquidity needs or concerns are not a fit. Nor are clients requiring a coupon or cash flow. To optimize this investment strategy, investors need to have sufficient holding power. U.S. rare coins should be worthy of consideration for clients looking for low-maintenance investments characterized by low risk, low volatility and non-correlation. Enhanced Transparency and Liquidity
Expert certification of U.S. rare coins is easy to access, affordable and comes with a guarantee of authenticity. In addition to rarity, one of the fundamental factors in determining the value of rare coins is the physical condition or grade of the coin. Professional Coin Grading Service and Numismatic Guaranty Corporation are two grading firms that offer guarantees of both grade and authenticity. This is a sharp contrast to the art market, where concerns about authenticity and forgery, are on the rise. Moreover, there
is a network of thousands of rare coin dealers willing to provide bids on coins. Price guides are plentiful and published independently. Online and physical auctions are common. This has all contributed to a more evolved, liquid and transparent U.S. rare coin market. Storage and Insurance
Unlike Gold ETFs and more traditional securities, many U.S. rare coin investment strategies require that investors take physical possession of hard, tangible, assets—the rare coins themselves. However, investors can avoid the safekeeping costs and logistical challenges traditionally associated with purchasing rare coins. As a service to clients, a rare coin asset manager may offer storage and insurance at no charge as part of the ongoing commitment to the client relationship. Choosing An Asset Management Firm
Arguably the most important decision an investor can make before embarking on U.S. rare coin investing is choosing the right rare coin advisory firm and asset manager. Basic requisites for a firm are its high-end U.S. rare coin market knowledge, experience, access to current information and relationships with key market participants. There are also intangible factors that contribute to differentiating the best from the rest. Given the longterm nature of the asset and investment profile, investors should seek a rare coin firm having a long-term relationship orientation and a strong human component. Structuring and funding a client’s portfolio is the beginning of the relationship, as a rare coin asset manager will serve as a family’s trusted advisor in the U.S. coin market. This ongoing relationship dynamic enables investors to retain complete control of their portfolio of assets, while their advisor brings them profitable selling opportunities as they present themselves in the marketplace. When heirs inherit a rare coin portfolio, they will not be alone in attempting to understand and value their assets. A good rare coin asset manager will advise heirs of their options and work with them to Continued on page 59
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32 | private wealth magazine | summer 2016
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Special Sponsored Section
SOUTH DAKOTA TRUST ASSOCIATION
THE SOUTH DAKOTA STORY The state’s trust laws have evolved to meet modern wealth-transfer needs.
T
HE CASUAL OBSERVER HAS PROBABLY ENCOUNTERED
a South Dakota story without even knowing it. Such stories have been told in “Dances With Wolves” and “The Revenant,” the television series “Deadwood” and Laura Ingalls Wilder’s book, “Little House on the Prairie.” The next great story involves the massive transfer of wealth between generations and the preservation of that wealth through South Dakota’s compelling modern trust law tools. The state’s trust services industry has evolved to meet the demands of this wealth transfer, delivering more planning options, protection, control and flexibility than ever before.
How It Started
In 1983, South Dakota repealed its rule against perpetuities, clearing the way for the dynasty trust, a multigenerational estate-planning tool that avoids federal and death estate tax for assets held in trust forever. Because South Dakota also does not have a state income tax, the dynasty trust also avoids taxation on undistributed, retained income across generations.
SUMMER 2016 | PRIVATE WEALTH MAGAZINE | 33
Special Sponsored Section | S o u th da k o ta tr u st associ ati on
Simultaneously, the banking and trust industries worked together to propel South Dakota’s trust industry forward. In 1997, then-Gov. William J. Janklow created the Governor’s Task Force on Trust Administration and Reform, bringing together representatives from the trust industry and state government to make South Dakota’s trust laws the best in the nation. The task force’s effectiveness is demonstrated by South Dakota’s progressive trust laws and the number of trust companies located in South Dakota. With 86 public and private non-depository trust companies, South Dakota leads the nation. Taxation: None
South Dakota has no corporate, trust or personal income tax. State taxes on an inheritance or transfers at death are constitutionally prohibited. Privacy
trust legislation, allows bifurcation of trust duties, enabling third parties to serve as distribution or investment advisors or protectors. These modern tools have reduced trustee liability, resulting in more reasonable trustee fees and advisor flexibility. Fiscally Sound State
South Dakota’s progressive trusts laws are not the only reason it has been successful. South Dakota is fiscally sound and is constitutionally required to maintain a balanced state budget. It maintains a significant reserve in its general fund, a triple-A bond rating and a healthy surplus in its state retirement plan. In addition, industry professionals have come together to form the South Dakota Trust Association to help the state’s trust industry actively address regulatory, marketing and educational issues and to give back to the state’s community.
As trust and tax laws change nationally and internationally, South Dakota will continue to be at the forefront of the trust industry.
South Dakota has enacted legislation enabling grantors to limit beneficiaries’ rights to information. State law also protects trust documents in court proceedings by providing an automatic seal of court records in perpetuity. South Dakota’s powerful privacy provisions are more comprehensive than any other state and are one of many reasons why families and their advisors choose South Dakota. Other Trust Law Features
In addition to public trust companies, South Dakota is a leader in the chartering of private trust companies offering wealthy families the benefits of South Dakota trust law and in providing a regulated structure in which family wealth can be controlled. Private trust companies enable families to increase their involvement in managing wealth; limit personal liability of those individuals administering trusts; meet federal securities law exemptions; and manage taxes. The state has been at the forefront of trust reform, modification and decanting, allowing families to easily migrate older trusts from other states and foreign jurisdictions to modernize trust provisions. Self-settled trusts are also allowed in the state. The South Dakota domestic asset protection trust shields assets from third-party liability, including spouses in a divorce proceedings, creditor claims and judgments, while allowing individuals establishing the trust to retain some control over trust assets, receive income and enjoy a discretionary benefit during their lifetime. South Dakota’s two-year fraudulent conveyance statute is among the shortest in the country. In addition, South Dakota, with its powerful directed 34 | private wealth magazine | summer 2016
International Planning
With new international and IRS reporting requirements, cross-border clients are more likely than ever to benefit from South Dakota trust laws. The state is the perfect jurisdiction for families seeking the establishment or domestication of trusts, including non-resident alien dynasty trusts, self-settled trusts for pre-immigration planning, foreign grantor trusts, standby domestic dynasty trusts, domestic dynasty trusts and domestic trusts governed by foreign law. The domestication of offshore entities in South Dakota is also a growing trend. Likewise, international businesses and families are showing increased interest in creating public and private trust companies in the state. Community Property Special Spousal Trusts
Effective July 1, South Dakota will offer the community property special spousal trust, a planning tool unavailable in most other states. Married settlors of these trusts avoid state taxation on undistributed retained income within the trust. The property is treated as community property at the death of the first spouse, receiving a 100% step-up in basis at date of death and avoiding federal capital gains on marital trust assets when sold. The Story Continues
The South Dakota story has much to offer, yet much remains unwritten. As trust and tax laws change nationally and internationally, South Dakota will continue to be at the forefront of the trust industry. Unprecedented levels of wealth transfer in the U.S. and interest from the international community are poised to make the next chapter the most interesting one yet. www.pw-mag.com
VIEWS FROM THE EXPERTS JESSICA BEAVERS, CTFA President BTC Trust Company of South Dakota
ALICE L. ROKAHR President Trident Trust Company (South Dakota) Inc
The Directed Trust—A Client-Friendly Alternative to Traditional Trusts
South Dakota: A Trust Domicile of Choice for International Families
The concept of a directed trust dates back to the mid 1980’s. A directed trust is a trust where the traditional, common-law duties of a trustee are divided into separate roles for trust administration, investment management, and discretionary distribution management. The persons filling the investment and distribution management positions act in conjunction with an administrative trustee to implement the trust’s terms. In a typical directed trust, additional provisions are included in the trust instrument to provide for the use of a Trust Protector. A directed trust is a useful tool in estate planning because it provides the settlor with the opportunity for greater family input and flexibility. However, a directed trust is not the same in all states. It is important to review each state’s statutes to determine what duties can be given to the various roles, what fiduciary duty is imposed upon the appointed persons and the trustFlexibility ee and what abilities the appointed and control are persons or the trustee have to limit what clients or restrict liability. If the statutory seek when framework of the settlor’s state of searching residence does not fulfill the settlor’s out South wish to divide the trustee responsibilDakota situs. ities among various persons, it is useful to be aware of other states’ statutory frameworks that may address those needs. Consideration of how to fill the fiduciary roles, along with each state’s statutory treatment on taxation of trusts, asset protection, duration, privacy, decanting, and the rights of beneficiaries are all crucial in providing a client with a trust that will best achieve his or her wealth planning objectives. This planning can be done by keeping the client’s investment advisory team intact. Flexibility and control are what clients seek when searching out South Dakota situs.
Increasing numbers of international families and their professional advisors are including U.S. trusts in their international tax, asset protection and estate planning.
Research conducted and contributed by BTC Trust Company of South Dakota. See our corporate profile and disclosure information on page 41. For more information, please visit www.BTCSouthDakota.com.
A number of inter-related factors are fuelling this trend. These include: • Changing perceptions of the advantages offered by traditional offshore trust domiciles; • Tax and administrative benefits available through the use of a U.S. trust; • Access to a stable political environment, the rule of law, low or minimal taxes and an advanced and transparent financial system; and • The realization by many international families that their planning must be both compliant and transparent, yet protective of their legitimate confidentiality concerns, and that the U.S. can meet these tests. Situations where a U.S. trust might be advantageous for an international family include: • An existing foreign grantor trust with U.S. beneficiaries and an aging settlor; • Property owned by a foreign trust that is used by U.S. beneficiaries; • A desire by U.S. beneficiaries to avoid the time and costs incurred in complying with U.S. foreign trust reporting rules; and • Establishment of a new onshore trust by a foreign grantor, with limited exposure to U.S. income or capital gains taxes. South Dakota is frequently ranked first amongst U.S. trust jurisdictions. Reasons for this leading jurisdiction status include: • A modern trust regime that is monitored by a standing trust law task force and updated in response to legal and fiscal developments impacting the use of trusts. • The state’s Directed Trusts statute allows owners of closely held businesses to maintain control over the direction and management of the family business. • By abolishing the Rule Against Perpetuities, assets held in trust can be permanently insulated from the federal transfer tax system—the gift, estate, and generation skipping taxes—allowing the value of the trust’s assets to grow more rapidly. • South Dakota’s confidentiality statutes are among the most protective in the U.S. See our corporate profile and disclosure information on page 42. For more information, please visit www.tridenttrust.com. SUMMER 2016 | PRIVATE WEALTH MAGAZINE | 35
Special Sponsored Section | S o u th dakota tr u st associ ati on
Antony Joffe President Sterling Trustees
The Difference Between Privacy and Secrecy and Tax Evasion and Tax Deferral
There has been a lot written in the press recently regarding the Panama Papers. In case you haven’t heard of the Panama Papers, it’s a treasure trove of data leaked to the press regarding the creation of thousands of companies in Panama by the rich, famous and politically connected around the world to provide secrecy regarding their affairs as well as evade taxes in most cases. The leak of this data has led to the resignation of the prime minister of Iceland and has bought unwanted attention to Vladimir Putin, David Cameron and many other world leaders that had structures in Panama. The Panama Papers has led to unwanted attention on the murky offTax deferral is shore industry and the ability to hide not tax evasion assets with shell companies and potennor is it illegal. tially evade taxes. The fallout has also led the foreign press to write some unflattering articles filled with innuendo about U.S. jurisdictions such as South Dakota, Delaware and Nevada, implying the same secrecy and tax evasion is happening here in the U.S. Nothing could be further from the truth. In South Dakota, which has passed favorable privacy laws enabling families to protect their names in case of a lawsuit or protect family members from each other when it comes to knowing the existence of a trust, there is a big difference between secrecy and privacy. Because of both IRS regulation and state bank regulation, none of these entities can escape strict Know Your Customer, AntiMoney Launding and Bank Secrecy act compliance in order to open a trust and associated banks accounts. In order to open a bank account, you need to have a tax identification number that enables the IRS to ensure these entities don’t escape federal taxes. South Dakota has created a favorable state tax regime where trusts don’t pay any state tax. This creates potential state tax deferral opportunities for out-of-state families until trustees distribute proceeds into their home state. Tax deferral is not tax evasion nor is it illegal, as has been implied by the foreign press. See our corporate profile and disclosure information on page 42. For more information, please visit www.panamapapers.icij.org.
Adam D. Cox Senior Group Executive, Wealth Management The First National Bank in Sioux Falls
The Demand for a Sophisticated Partner
The advantages of utilizing South Dakota as a trust jurisdiction are well-chronicled: • No rule against perpetuity • No state income tax • Ensures all trust cases will be sealed in perpetuity • Strong law against claims of improper dominion and control • Asset protection from irresponsible beneficiaries • Favorable to trust migration What may be less well-known, however, is the high level of sophistication available to support and serve ultra high net worth clients and their advisors looking to utilize our state’s favorable trust laws. The ultra high net worth client segment is one that has traditionally been well-served by a bevy of strategists and advisors including, but not limited to, accountants, investment consultants, lawyers, and philanthropic advisors. And more often than not, it was one of these professionals who created the initial awareness of using South Dakota as a strategic trust jurisdiction, taking advantage of our attractive regulatory environment. However, the South Dakota trust industry is much more than a collection of the laws which supports it. Trust administration—no matter where it is performed—is work requiring a distinguished level of skill and expertise. The Trust administration — same can be said of the specialno matter where it ty areas necessary to support is performed — is it (e.g. tax, legal, investment work requiring a management, operations, risk distinguished level of management, compliance, skill and expertise. etc.). Granted, there are—and likely always will be—many local trust companies that will not directly handle services ancillary to trust administration, such as asset management or the exercise of broad discretionary powers. But, there are those of us that happily offer a full suite of wealth management services—for whom, offering a high degree of sophistication in conjunction with an unparalleled client experience have become “table stakes.” And when done well, exceptional, local firms create a win-win-win scenario: our clients receive great service; their pre-existing advisors get the support of another leading-edge partner; and the South Dakota trust industry grows the number of highly-compensated professionals serving and attracting new business to the State. See our corporate profile and disclosure information on page 41. For more information, please visit www.fnbsf.com.
36 | private wealth magazine | summer 2016
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Trust In Us
Your Sophisticated Partner
With nearly $4 billion in assets, our trust services have earned the confidence of generations of families in the state and in the region. When you trust in us, you can expect integrity, continuity, availability, confidentiality, and accountability.
This in-house financial planning team includes 12 attorneys, 2 Chartered Financial Analyst charterholders (CFA®), a Certified Financial Planner (CFP®), a Certified Public Accountant (CPA), a Certified Retirement Services Professional (CRSP), 3 Certified Trust and Financial Advisors (CTFA©), and 2 Certified Corporate Trust Specialists (CCTS), all of whom are dedicated to serving each client.
800-553-7073 fnbsf.com/wealth-management
Est. 1885 Sioux Falls, SD
Special Sponsored Section | S o u t h d akota tr u st assoc i ati on
Chip Martin President Concord Trust Company LLC
Open Architecture Trust Design—The Emergence of “Multi-Participant” Trusts Administered in South Dakota
Wealthy families face an ever-increasing set of challenges managing their assets across generations. Major changes in trust law, combined with modern investment strategies, new tax factors and complex family dynamics, have created demands that traditional trusts and institutional fiduciaries are not well equipped to handle. In the face of these demands, many families, based on guidance from their expert advisors, are moving away from conventional bundled trust service models to new A directed trust “multiparticipant” trust structures. company will As families move to gain more complement, not control over certain trust functions, compete with, multiparticipant trusts, and the their existing “pure-play”directed trust companies team of financial that administer them, have emerged advisors. as powerful tools for achieving families’ estate planning objectives. This form of trust designates and coordinates various fiduciaries to manage the many facets of sophisticated estate planning. Examples of roles within a multiparticipant trust include investment advisors, distribution committees and trust protectors who direct the qualified South Dakota administrative trustee to implement their decisions. These participants are granted specific powers by the trust based on their skill, location or relationships. They are responsible only for the duties that they are best equipped to assume. This approach is a great advance for many families over the traditional unitary trustee model, where single or co-trustees lack either the in-depth expertise or the appetite for risk needed to effectively navigate complicated investment and legal terrain. Furthermore, since most directed trust companies do not offer integrated wealth management services, families can rest assured that a directed trust company will complement, not compete with, their existing team of financial advisors. The model allows families to retain more control over asset disposition without the overhead and regulation associated with establishing a separate, private family trust company. With the passage of a series of modern trust laws over the past two decades, the South Dakota legislature has answered the demand for statutes that support advanced estate planning and multiparticipant trusts. These multiparticipant trusts, administered by a qualified South Dakota based administrative trustee, offer perhaps the most efficient and cost-effective method for accessing the unique asset protection, tax and many other benefits of South Dakota trust law.
David A. Warren, J.D. President and CEO Bridgeford Trust Company
Bridgeford Trust Company: A New and Emerging Wealth Management Service Paradigm
Operating as an administrative trustee and not as an asset manager or insurance provider, Bridgeford Trust Company is “advisor friendly” and a natural collaborator with investment managers, insurance professionals, and family/multifamily offices, working together in close synergy with financial planners, attorneys, and CPAs to bring powerful and sophisticated trust planning solutions to families across the country and around the world. Utilizing South Dakota’s Directed Trust, Trust Protector and Self-Settled Domestic Asset Protection Statutes, Bridgeford Trust delivers far more control to settlors of trusts, beneficiaries and their advisors than ever before, allowing them to use advisors of their choosing and hold non-traditional assets in trust, such as closely held stock, real estate and insurance. In addition, trust administration and client service is efficiently executed through an impressive team of highly experienced and detail-oriented trust professionals in a boutique and very responsive service model. Leveraging the sophistication of South Dakota’s mod ern trust laws and status as a no income tax state, Bridgeford Trust engages compelling planning techniques, such as the Dynasty Trust, Incomplete Non-Grantor Trust, and the newly enacted Community Property Trust. The Community Property Trust is a progressive structure allowing for a 100% step up in basis at date of death of the first spouse relative to property held in trust, thereby creating the opportunity to avoid state capital gains and federal The United estate tax forever within the protecStates has tive entity of one of the nation’s best emerged as domestic asset protection structures, one of the all while availing themselves of the safest tax and strongest privacy laws in the country. privacy havens Considering heightened concerns in the world. around cost, international reporting requirements and the security of confidential information, brought to light most recently by the Panama Papers, and the fact that the United States has emerged as one of the safest tax and privacy havens in the world, Bridgeford Trust’s boutique and highly confidential service model, coupled with the power of South Dakota law, presents a compelling alternative to “offshore” planning for international and domestic families in need of sophisticated tax, asset protection and privacy solutions. Subscribe to our e-mail newsletter to keep up-to-date with the latest developments in the wealth and trust planning arena at www.bridgefordtrust.com/subscribe. See our corporate profile on page 41. For more information, please visit www.bridgefordtrust.com.
See our corporate profile and disclosure information on page 41. For more information, please visit www.concordtrustcompany.com 38 | private wealth magazine | summer 2016
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Thomas V. Van Robays, J.D. President Dakota Guardian Trust
Patrick G. Goetzinger Partner Gunderson, Palmer, Nelson & Ashmore LLP
Collaborative Wealth Management
South Dakota’s status as a “trust friendly” state for dynasty trusts is well known. Yet South Dakota’s trust laws offer many benefits in addition to dynasty trusts. As a practical matter, not every wealthy family desires or needs a dynasty trust. So what other advantages are driving settlors, attorneys and financial advisors to South Dakota? South Dakota laws on asset protection trusts are very settlor-friendly. The absence of a state income tax also motivates many settlors to locate their trusts in South Dakota. Another attractive feature is that families can continue to use their own financial advisors. High-net-worth families often have relationships with financial advisors that go back many years. In the past, those advisors were usually cut out by corporate trustees seeking to manage the assets in-house. Trust laws were not friendly to the concept of letting trustees shift investment responsibility to non-trustees. However, the evolution of trust laws has given Delegated trusts settlors more options than ever before. allow the use Corporate fiduciaries can now delegate of the family’s many functions including asset maninvestment agement. Going a step beyond the so management called delegated trust is the directed team. trust. This allows the settlor to parse out different trust functions among several entities. For example, the investment function may rest with the settlor, an investment committee or other party distinct from the corporate trustee. Delegated trusts allow the use of the family’s investment management team. The trustee, though, still maintains a level of oversight and responsibility. With a directed trust, the settlor can remove all investment oversight from the trustee. Families like this because they can keep their own financial teams in place. Corporate trustees like this because they have insulation from investment management liability beyond that of delegated trusts. The trust-friendly framework in South Dakota has already attracted many families seeking to create dynasty trusts. However, the trust environment in the state does indeed offer a great deal more than that one benefit. Families wishing to work with their chosen financial team on a generational basis are discovering the benefits of locating their trusts in South Dakota. See our corporate profile and disclosure information on page 41. For more information, please visit www.dakotaguardiantrust.com.
Andrew J. Knutson Partner Gunderson, Palmer, Nelson & Ashmore LLP
South Dakota’s Asset Protection Dynamic Duo
South Dakota’s trust laws are the best in the country, but not to be overlooked are South Dakota’s much heralded business entity statutes for limited liability companies (LLC) and limited liability limited partnerships (LLLP). A South Dakota LLC or LLLP, owned by a South Dakota trust, is a common and powerful asset protection shield. Both the South Dakota LLC and LLLP choices offer a substantial asset protection guard, primarily because a judgment creditor’s sole and exclusive remedy against member or partner is a “charging order.” A charging order limits the judgment creditor’s remedy against a partner or member to a lien on the partner’s or member’s distributions from a LLC or LLLP. This prevents the creditor from seizing or selling assets owned by the entity. The charging order creates a roadblock to the disruption of the entity’s business and investments due to a creditor-plagued member or partner. South Dakota’s charging order statutes are among the most protective in the country, primarily because such statutes (1) prohibit a court from expanding the remedy or issuing a broad charging order, (2) prevent judicial foreclosure of a member’s or partner’s South Dakota’s interest, and (3) deny other legal and trust laws are equitable remedies against the entity. the best in the Additionally, South Dakota law is clear country. that the charging order is the judgment creditor’s sole and exclusive remedy against the member’s interest in a single member/single owner LLC. There are many reasons to utilize a South Dakota entity and trust beyond asset protection. For example, if you have thought about tax-efficient investing through Private Placement Life Insurance, a South Dakota entity, properly structured, will allow you to qualify for South Dakota’s premium tax which is one of the lowest in the nation. Whatever the goal, pairing a South Dakota LLC or LLLP with a South Dakota trust provides families with a dynamic duo that achieves a multitude of planning objectives. See our corporate profile and disclosure information on page 42. For more information, please visit www.gundersonpalmer.com.
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Special Sponsored Section | S O U TH D A KO TA T R UST ASSOC IATI ON
AGATHA JOHNSON, CFP, CPWA Certified Executive Coach Generations To Generations LLC
Family Coaching: Improving the Success Rates of Generational Wealth Transfer
South Dakota Trusts offer great opportunities for families to have their wealth continue for generations to come. Family enterprises can encompass family businesses, investments, philanthropy and more which leads to complexity. Family coaching gives a greater opportunity for the family wealth to continue by addressing not only the Financial Capital but also the Structure (Governance within the family), Societal, Family, Human Capital (Development of Heirs) and Spiritual. Dalai Lama has a quote—“Lack of transparency results in distrust.” Some might say they don’t want to disclose what their net worth is or what they want for themselves and or wealth in life, however they miss the opportunity to give the greatest gift to their family, which is the gift of knowledge and stewardship. By opening the lines of communication with themselves and their family they open the door to the opportunity to develop the heirs to create awareness and receiving of wealth during life and at death. We take an intentional focus to address all areas of capital
with the family and preparing heirs at all ages. Building the trust, knowledge and communication for a successful transition of family wealth and values will create the balance between resources for consumption and stewardship so all elements of wealth will continue to grow and pass. Financial wealth should be accompanied by a set of values toward which the whole family is expected to aspire, by the meaning and purposes to which the family’s assets and wealth are to be used, and by the expectations of family members and their responsibility as well as their role in the community and their relationships. A family that works through family Financial wealth values, a family mission statements, should be participating in family meetings and accompanied society, will help all family members by a set of values to have a core of basic principles to toward which which they can adhere to and help all the whole family heirs to have unity. Creating a family is expected constitution will communicate the famto aspire. ily purpose behind the family business and or wealth and includes the founder’s story. It can be amended and added to by each generation. A successful wealth transition should be a source of pride and direction to each heir as they come together from one generation to the next. See our corporate profile and disclosure information on page 42. For more information, please visit www.g2gconsulting.net.
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PROFILES BRIDGEFORD TRUST COMPANY, a boutique and independent trust company with South Dakota Trust
powers, provides progressive trust administrative services to families across the United States and around the world. Bridgeford Trust delivers tremendous control and flexibility to settlors, beneficiaries, and their advisors through South Dakota’s industry leading modern trust laws, including directed trusts, self-settled domestic asset protection trusts, trust protectors, and decanting. Leveraging these modern trust laws and South Dakota’s powerful privacy provisions and favorable tax environment, Bridgeford Trust represents a new and emerging wealth management service paradigm built around true independence, collaboration, and world-class capabilities. BTC TRUST COMPANY OF SOUTH DAKOTA (BTC TC) was established in response to our clients’ desire for access to the benefits of South Dakota trust situs. We accommodate the full range of trust needs and can serve in a variety of capacities, including Trustee, Directed or Administrative Trustee, Agent or Custodian. BTC TC is a state chartered trust department monitored by the Division of Banking in South Dakota. BTC TC has established a niche of accommodating financial advisors across the country who are looking to service the investment management needs of their clients. CONCORD TRUST COMPANY is a state-chartered trust company focused on directed trustee services. We serve high-net worth families, from both the US and overseas, with knowledgeable and discrete administrative trustee services that provide access to South Dakota and New Hampshire’s asset protection, tax and many other trust advantages. Unlike traditional trust companies with integrated wealth management, CTC does not control investment decisions or compete with families’ existing investment managers. Instead, we are directed by families or their advisors on asset disposition. This model permits families to concentrate on strategic decisions, while we focus on administrative tasks.
Safeguarding what matters to you is what DAKOTA GUARDIAN TRUST is all about. Through a wealth of legal advantages, a broad spectrum of investment options, and outstanding professional trust services, we help bring your foresight to fruition. Dakota Guardian Trust redefines the relationship between institutional trustees and wealth management professionals through successful strategic partnerships. With our advisor friendly approach, we collaborate with the financial advisors, accountants and attorneys who helped build you legacy. To learn more about our positively different structure, contact Dakota Guardian Trust at www.dakotaguardiantrust.com.
Established in 1885, THE FIRST NATIONAL BANK IN SIOUX FALLS remains the oldest and largest independent community bank in South Dakota—owing its longevity to a combination of service, stability, innovation and family involvement. Our Trust & Investment Management Services group is recognized as a regional leader with approximately $4 billion in assets, offering a full suite of wealth management services including personal trust administration, estate settlement, investment management, and dynasty trust services. Our in-house team of professionals includes attorneys, Chartered Financial Analyst charterholders (CFA®), Certified Financial Planner (CFP®) certificants, Certified Public Accountants (CPA), and Certified Trust and Financial Advisors (CTFA©), all of whom are dedicated to serving the needs of our clients. Our investment team works directly with our administrators to offer our clients an evidence-based approach free from conflicts and proprietary products. Additional information can be found on our website, www.fnbsf.com or by calling (800) 553-7073.
Life is full of possibility now and for future generations. Choosing the right trust professionals to help you manage and preserve your family’s wealth is a critical step. FIRST PREMIER BANK is a community bank that provides deep expertise, where our trust professionals offer decades of experience. Our bank enjoys a position of unparalleled financial strength, and a plan for ownership stability and institutional longevity that reaches beyond the foreseeable future. Wealth built to serve generations does best in the care of a corporate trustee built to serve generations. Contact us at 605-357-3174 or 866-951-6800. www.firstpremier.com. SUMMER 2016 | PRIVATE WEALTH MAGAZINE | 41
Special Sponsored Section | S o u th d a k o ta tr u st associ ati on
Founded by Agatha Johnson, Generations To Generations LLC was started after years of working in the industry and seeing many families struggle with the multi- generational succession of wealth that can sometimes be derailed even with a well thought through estate plan. Our team helps families take an intentional focus on successfully transitioning their wealth by preparing heirs in all elements of wealth. Those areas of wealth are financial, structural, human capital, family, societal and spiritual. We do this through family meeting facilitation, family & individual coaching, generational wealth planning, develop leadership in the next generation, heir preparation, facilitate the written family constitution and business and family vision, strategy & governance. Gunderson, Palmer, Nelson & Ashmore, LLP has attorneys who focus their practice on the
latest techniques for trusts and asset protection. Patrick G. Goetzinger and Andrew J. Knutson lead the firm’s trust and asset protection group, and provide a mix of proven experience and modern strategies. Pat and Andrew have experience in decanting, reformation, and modification of irrevocable trusts; formation of public and private trust companies; have served as local counsel for out-of-state attorneys and family advisors; and work daily creating trusts and business entities that combine the unique asset protection and tax advantages of South Dakota law.
With currently more than $30 billion in assets under administration, South Dakota Trust Company (SDTC) offers pure trust administration without any products, working with whomever the client or advisor wishes regarding investments, insurance and custody. Additionally, SDTC also administers trusts with all types of non-financial assets, e.g., LLCs, FLPs, closely held stock, real estate and off shore entities. As a result of South Dakota’s top rated and unique trust, asset protection, income tax, and private family trust company laws, SDTC works with families all over the globe, serving as trustee, as well as, corporate and/or trust agent for family-owned private trust companies.
Sterling Trustees is an independent South Dakota-chartered trust company providing trust and
administration services to high-net-worth families. The company administers over $2.1 billion of client trust assets across the country. Sterling Trustees’ business model is built on the premise that a trustee should not act as an investment advisor nor the custodian of trust funds. Sterling instead works with outside investment advisors of the client’s choice, with assistance in sourcing from Sterling, to invest the funds on the trust’s behalf with an independent custodian. Sterling maintains offices in Sioux Falls, S.D. and Philadelphia.
Trident Trust Company (South Dakota) Inc is a public trust company licensed by the State of
South Dakota. Located in Sioux Falls, we offer a range of fiduciary and administrative services supported by the resources and experience of the Trident Trust Group in 24 jurisdictions. Established nearly 40 years ago, the Group’s clients include many of the world’s largest banks and brokerage firms, leading law and accounting firms and high net worth individuals and their families. We offer clients access to a wide range of services, from traditional corporate domicile representation to the administration of complex trust and fund structures.
Private Trust Company
Shared Family Office
Sioux Falls, South Dakota
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South Dakota Trust Association These companies offer best-in-class services for all of your South Dakota Trust needs.
Bridgeford Trust Company
First Lawyers Trust Company, LLC
Meristem Trust Company, LLC
bridgefordtrust.com David A. Warren, JD, President and CEO dwarren@bridgefordtrust.com 605-224-1372
firstlawyerstrust.com Joel Black, Executive Vice President jblack@firstlawyerstrust.com 605-791-5135
meristemfw.com/trust-co Jon Crow, Partner/Vice President MTC jcrow@meristemfw.com 952-405-7940
BTC Trust Company of South Dakota
First National Bank
North Point Trust Company, LLC
BTCSouthDakota.com 605-338-5033
fnbsf.com Adam D. Cox, Wealth Management Senior Group Executive adcox@fnbsf.com 605-335-5187
northpointtrust.com Todd Wiles wiles@northpointtrust.com 605-718-5722
First PREMIER Bank
redstonelawfirm.com Mr. Terry N. Prendergast, Esquire terry@redstonelawfirm.com 605-331-2975
Concord Trust Company, LLC concordtrustcompany.com Chip Martin, President cmartin@concordtrustcompany.com 603-219-0264
CorTrust Wealth Management cortrustbank.com John A. Heisler jheisler@cortrustbank.com 605-444-4024
Corundum Trust Company centralbancorp.com Jim Riswold, President jim.riswold@centralbancorp.com 605-336-2024
Cutler Law Firm, LLP cutlerlawfirm.com Jayna M. Voss, JD jaynav@cutlerlawfirm.com 605-335-4950
Dakota Guardian Trust dakotaguardiantrust.com Thomas V. Van Robays, J.D., President tvanrobays@dakotaguardiantrust.com 402-397-5241
Delta Trust Company of South Dakota, Inc. deltatrust.net Todd J. Bernhard, Chief Executive Officer tbernhard@deltatrust.net 605-224-4001
Eide Bailly LLP eidebailly.com Jessica Armstrong, Business Development Manager jarmstrong@eidebailly.com 605-977-2742
Equity Trust Company trustetc.com Michael Dea, President m.dea@trustetc.com 440-323-5491 ext. 7286
First Bank & Trust Wealth Management bankeasy.com Robin Aden, JD, CTFA, AEP® robin.aden@bankeasy.com 605-978-1128
Redstone Law Firm LLP
firstpremier.com Jeff Rodman, VP Trust Marketing jrodman@firstpremier.com 605-357-3125
Frontier Bank Trust Services
Sageworth Trust Company of South Dakota, LLC
frontierbk.com Gary L. Popkes, Senior Vice President garyp@frontierbk.com 605-332-3832
sageworth.com Timothy P. Brown, President & CEO tbrown@sageworth.com 717-735-8001
Generations To Generations, LLC
South Dakota Trust Company LLC
g2gconsulting.net Agatha Johnson, CFP CPWA, Certified Executive Coach agathaj@prosperityconsulting.net 605-275-9181
sdtrustco.com Pierce H. McDowell III, President & Co-Chief Executive Officer Pierce@sdtrustco.com 605-338-9170
Great Western Bank
Sterling Trustees LLC
greatwesternbank.com Kristi Metzger, SVP Wealth Management Kristi.Metzger@greatwesternbank.com 605-333-7525
sterlingtrustees.com Antony Joffe, President ajoffe@sterlingtrustees.com 610-234-0626
Gunderson, Palmer, Nelson & Ashmore, LLP
The First National Bank in Sioux Falls – Trust & Investment Management Services
gundersonpalmer.com Patrick G. Goetzinger, Partner marketing@gpnalaw.com 605-342-1078
fnbsf.com Adam D. Cox, Wealth Management Senior Group Executive adcox@fnbsf.com 800-553-7073
Liberty National Bank, Wealth Management Division
The Kingdom Trust Company
libertynationalonline.com Jerus J. Campbell, Esq. jerusc@libertynationalonline.com 605-782-4545
kingdomtrust.com Charles (Bo) Ives, President cives@kingdomtrust.com 270-226-1019
Lindquist + Vennum LLP
Trident Trust Company (South Dakota) Inc
lindquist.com Mary A. Akkerman makkerman@lindquist.com 605-978-5204
tridenttrust.com Alice Rokahr, President arokahr@tridenttrust.com 605-679-4355
Lynn, Jackson, Shultz & Lebrun P.C.
Woods, Fuller, Shultz & Smith P.C.
lynnjackson.com McLean Thompson Kerver mkerver@lynnjackson.com 605-342-2592
woodsfuller.com Lisa J. Maguire, Esq. Lisa.Maguire@woodsfuller.com 605-336-3890
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Spe ci al f e atu r e | l i qu i d alte r nati v e s invest ing
Growing Pains Liquid alternatives find hope for renaissance after dry stretch. By David Sterman
You can almost feel the palpable sense of relief
among the fund managers that operate in the liquid alternatives (“liquid alts”) category. Choppy stock and bond markets that first appeared in the summer of 2015 have finally created a more favorable backdrop for these funds. Liquid alts follow hedge fund-style capital preservation strategies while still seeking absolute positive returns. And recent performance bears out a modest renaissance. As a broad proxy, the HFRI Fund Weighted Composite Index has risen for three straight months (through February 29). If such market conditions persist throughout 2016, then these funds may finally post the strong risk-adjusted returns that many of their backers have been waiting for. Make no mistake, it’s been a difficult multiyear stretch for these funds, as unprecedented actions taken by the Federal Reserve produced a spectacular secular bull market for traditional stocks and bonds, preventing traditional alternative asset strategies from performing as expected. But the backdrop is improving. “Now that the Fed isn’t playing as central a role in markets, some liquid alts strategies are again showing the kinds of benefits that have historically led to impressive risk-adjusted and non-correlated returns,” says Matt Osborne, chief investment officer of Altegris Advisors. For investors that like the general approach of hedge fund strategies, but wince at the “2-and-20” fee structure, liquid alts are clearly a better deal. According to Wei Ge, a senior researcher at Eaton Vance’s Parametric Portfolio division, traditional hedge fund management fees will consume 85% of all
investor returns over a 50-year time frame. The average liquid alt fund fee, in contrast, would eat up just 21% of returns. Returns All Over The Map
Still, investors are cognizant of the troubled recent past for liquid alts. “On average, many of these funds didn’t deliver the kinds of returns that many had been expecting,” says Jack Hansen, chief investment officer for Parametric’s Minneapolis Investment Center. Even in the relatively healthy market backdrop of the last six to eight months, many liquid alt funds continue to deliver negative returns, albeit less negative than the equity market. That performance issue, coupled with a surplus of products in an increasingly crowded field, is leading to a modest industry shakeout. While an average of 91 new liquid alt funds were opened each year from 2011 through 2015, fund closures have become the more recent theme. In 2015, 149 of these funds were shuttered, and we’re seeing elevated rates of fund closures again in 2016, according to Morningstar. It may not be wise to lump all of the liquid alt funds together. Returns among the various sub-categories have greatly varied, and some of them may not be suitable for the liquid alt approach. Take the unconstrained bond fund category as an example. Hedge funds are able to expertly navigate these assets, even though they can often be illiquid and require lots of leverage to generate returns. In that context, “these kinds of alt funds just don’t translate very well,” says Osborne. Yet other strategies appear better suited to the liquid alt summer 2016 | private wealth magazine | 45
adds. “It’s not just picking the right strategy, but also picking the right manager.” It’s that last point that pops up repeatedly in industry discussions. For firms like Envestnet PMC, the process of manager selection is crucial. The firm, which provides portfolio advisory services, focuses on an “Alpha Thesis” when it comes to liquid alt funds. “First, we want managers to clearly articulate the market inefficiency they are trying to exploit,” says Ken Shaw, Envestnet’s Rebuilding The Image In the face of tepid multiyear returns for many liquid alt senior vice president. All liquid alt fund managers will tell you funds, the heavy inflow into the funds has slowed to a trickle. that their proprietary approach is superior to the peer group, According to Morningstar, industry fund inflows peaked at $97 but fund results don’t always back up that sentiment. As a second test for these funds, Envestnet PMC looks at the billion in 2013 and slipped to $37 billion in 2014. In 2015, roughly $6 billion in assets flowed out of these funds, a trend size of the research team behind any liquid alt fund managers. Obviously, that approach is bound to favor the bigger firms that that continued in the early months of 2016. To be fair, traditional stock and bond funds saw much have access to the top fund managers and researchers. In fact, with the entry of big firms such as Blackstone, greater outflows in 2015. Yet that exodus from the traditional “60/40” (stock-bond) approach is not tangibly boosting the Goldman Sachs, BlackRock and others making a big push into liquid alts, smaller firms with limited flows for liquid alts, as was the case in distribution reach are starting to feel 2008 and 2009. the heat. That factor helps explain Larry Restieri, head of alternative In many respects, the recent rising tide of fund closures, sales for global third-party distribution according to Shaw. at Goldman Sachs Asset Management, 2016 is shaping up to Restieri notes that some firms may thinks that liquid alts are faring better be a transitional have underestimated the hedge-fundthan some may realize. “While the to-mutual-fund transition. “You don’t performance was underwhelming on year for the liquid necessarily need a big infrastructure an absolute basis in 2015, they did alts industry. to run a hedge fund, but mutual funds what they are supposed to do,” he says. require a lot of layers of administraRestieri notes that these funds are tion.” For liquid alt funds that haven’t built to correlate with their hedge fund counterparts, and relative to equities, they are clearly reducing amassed sufficient assets to manage, an eventual closure may portfolio volatility. A study conducted by Goldman found that be inevitable. Meanwhile, firms that have had previous success in hedge liquid alternatives outperformed their traditional, non-traded fund management, such as Millburn Corp. or Informed counterparts in 2015. Portfolio Management (IPM), are increasingly partnering with traditional retail fund management firms to launch liquid alt A Maturing Phase Despite the recent spate of fund closures, few think that mutual funds. “The big hedge funds have learned that it’s hard the niche has already peaked. “What’s taking place is the to make the transition to mutual funds on their own,” says natural sorting out of a segment of the mutual fund industry Andrew Rogers, CEO of Gemini Funds Services, a full-service that experienced rapid growth and has become to a certain fund administrator providing compliance, distribution and risk degree oversaturated,” noted Morningstar’s Josh Charlson in reporting services. a recent report. Yet for investor interest in these products to keep building, High Fees? Low Fees? Yes it’s increasingly clear that the industry “needs to raise the bar The other industry challenge involves fee structures, which concerning the knowledge of these products,” says William tend to be much lower than those of hedge funds but higher Kelly, CEO of the Chartered Alternative Investment Analyst than those of traditional mutual funds. And in light of the Association (CAIA). market share that stock and bond ETFs have taken from their In 2014, the association launched a 21-hour online course mutual fund counterparts, it’s fair to ask if a similar trend will that provides a comprehensive alternative investment educa- play out among liquid alts. tion curriculum. As advisors become better educated on the Indeed, a number of the bigger firms such as Goldman various aspects of alt investing, they also become better posi- Sachs and Blackstone are moving to cover both bases. tioned to explain such strategies to their clients. “These invest- “Certain alt approaches will lend themselves to passive manments have tangible portfolio benefits that may not be readily agement, while others will still require an active hand,” says understood by the average client,” Kelly says. Restieri. Goldman has been rolling out new liquid alt mutual “Advisors have a tough job [with alt investments],” he funds and ETFs simultaneously. wrapper. Managed futures funds, for example, have built solid long-term track records going back to 2000, according to research conducted by Altegris. Such funds are once again racking up respectable recent returns, now that volatility has returned to the market, says Osborne. He adds that trend-following, especially in fixed income and energy, has been a very fruitful strategy in 2016.
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Spe ci al f e atu r e | l i qu i d alte r nati v es invest ing
Altegris’s Osborne concurs, noting that “there is a continuing move towards lower fee solutions.” He is seeing an emergence of quantitative strategies that focus on factors such as carry trades or value-versus-growth algorithms. Those funds can utilize smaller portfolio management teams and can pass on the savings as a result. Baby Boomers To The Rescue
Perhaps the single greatest factor in favor of liquid alts is demographics. Roughly 10,000 baby boomers turn 65 every day, and that trend will stay intact for the next 14 years. These investors are a natural fit for liquid alts’ capital preservation approach. For any investors that hoped to retire near the end of the last decade, the sharp market drops in 2008 and 2009 led to a painful readjustment in the timing of retirement. Soon-to-be retirees today are surely cognizant of that period. In a recent white paper entitled “Liquid Alternatives: The Next Wave in Asset Allocation,” the alternative asset management team at Lazard Asset Management noted that liquid alternative strategies offer “a potential buffer to equity market downturns.” They think baby boomers will need “assets with characteristics such as lower volatility return streams, some measure of capital preservation during negative market environments, and diversification.” The key takeaway: “Liquid alternative funds will be a solution that is increasingly part of the asset allocation decisions for millions of Americans.” Cream Rising To The Top
With so many new funds hitting the market in recent years, performance is starting to become the primary selling point, especially in lagging sub-categories. In the long/short category, the average fund has lost an average of 5.7% (through March 22, 2016). Yet some managers, like Harin de Silva, president of Analytic Investors, have started to build a strong following. De Silva’s firm sub-advises the 361 Global Long/Short Equity Fund (AGAQX), which has delivered a 7.8% return over the past year. The approach is quite transparent. For every $100 invested on the long side in low-beta and low-volatility stocks, another $30 is used to short high-beta stocks. De Silva thinks that long-only strategies can only benefit from a rising market. “But in a long/short strategy, you need a much defter hand,” he says. The recent market backdrop has been favorable for him and his team. “The choppier the market, the better for us.” But the dispersion of returns among long-short funds has been all over the place. Successful short sellers “combine macro insight, thematic analysis, and fundamental stock selection with specialized risk-management techniques,” says Rick Lake, co-chairman of Lake Partners. Profitable shorts in recent market downdrafts capitalized on evolving market dynamics, according to Lake. “Last summer, investors grew increasingly discriminating in stock selection. This created multiple short opportunities—weak companies that were no longer being lifted by a rising mar
ket, former ‘hype’ and ‘hope’ stocks that were unable to meet unrealistic expectations, and companies that were leveraged to a downturn in energy and commodities.” Investors can also choose from a variety of other funds that have generally delivered category-beating returns and high marks from Morningstar. The AQR Managed Futures Strategy Fund (AQMIX), which gets a five-star rating from Morningstar, has scored in the top 10% of all managed futures funds on a three- and five-year basis. The 1.23% expense ratio is also below the industry average. The fund takes a complex but thus far successful approach to price movements in various asset classes. Its managers invest in futures contracts covering four asset classes (stocks, bonds, commodities and currencies) and alters various weightings in response to short-term and long-term technical trends. John Hancock’s institutional arm has posted impressive results working with a number of sub-advisors. In 2014, the Boston Partners Long/Short Equity fund was named Morningstar manager of the year in the alternatives category, and in 2015, the John Hancock Global Absolute Return Strategies fund and Boston Partners Long/Short research fund were both runners up. The BlackRock Multi-Asset Income Portfolio Investor C Shares (BCICX) fund has been a top performer in the multi-asset category. The fund, which invests in stocks, bonds and a range of alternative investments, has a dual focus on capital preservation and income generation. The fund, which merits a “Bronze” rating from Morningstar, benefits from the broad set of research resources that BlackRock Investments can offer to the fund management team. Perhaps the greatest measures of performance and value for liquid alt funds can be found in their Sharpe ratios (for risk-adjusted returns) and fund expenses. By those measures, the Vanguard Market Neutral Fund Institutional Shares (VMNIX) fares quite well. The fund’s 0.95 Sharpe ratio is tops in its category, according to Morningstar, while the 0.15% expense ratio (it’s 0.25% for retail investors) is almost unheard of in the liquid alt space. A Transitional Year
In many respects, 2016 is shaping up to be a transitional year for the liquid alts industry. The frenzied pace of asset inflows after the Great Recession of 2008 and 2009 has come to an end, replaced by a rotation away from some approaches that have lost popularity (such as non-traditional bond funds) and toward approaches that are seen as more relevant for today’s markets (such as managed futures funds). The industry is also welcoming the increased attention of traditional asset management firms such as Blackstone and Goldman Sachs, along with retail investing giant Vanguard. And thanks to enhanced educational efforts industrywide, investors are slowly moving up the learning curve with these funds. Despite some recent industry growing pains, the asset category, and the funds that back them, should garner greater acceptance in the years ahead. summer 2016 | private wealth magazine | 47
Special Sponsored Section
Views From The Experts Carrie Cook, President, Ignite Funding
Real Assets: Diversification Without Barriers
The volatility of the traditional and non-traditional markets over the last decade has provided one certainty: uncertainty is inevitable. During uncertain times, investors seek out strategies and advice to provide themselves long-term plans providing less volatility and less risk. This is usually done through diversification into new markets, asset classes and investment types. Many investors have the ability to expand into liquid alts and EFTs seeking alternatives and capital preservation outside the traditional mutual fund/stock axis. For a financial portfolio exclusively in traditional markets anyintegration of an alternative class breaks down barriers. However, until real assets are integrated the barriers will never be truly gone and “real” diversification will not be achieved. Real estate backed by collateral provides integration of secondary markets not correlated with bear or bull market movements. Real estate investing can provide opportunities to invest in a means that does not move in tandem with traditional financial markets. Despite unique risks and considerations, real estate investments can be a useful tool to improve the risk-return characteristics of an investment portfolio. It can increase diversification and reduce volatility, and at the same time, offer non-accredited investors the potential for enhanced returns. When evaluating the integration of real assets into a portfolio, the most ideal step is to integrate a passive, low-maintenance option. Trust Deeds provide many advantages; double digit returns, mitigated risk through collateral, personal guarantees and tax-sheltered growth without the high-maintenance processes traditionally aligned with real property. By integrating end-users and advisors alike, Ignite Funding provides a proven approach providing portfolio managers an experienced resource to integrate short-term real estate, expanded capabilities through real assets and integration of double-digit returns to increase overall portfolio results. Be the force that breaks down the barriers restricting true diversification. For more information, please visit info.ignitefunding.com/advisors
Ignite Funding is Redefining the Standard for investor-backed lending offering first trust deed investments in short-term acquisition, development and construction projects across the Southwest. Investors seek capital preservation in collateralized “turnkey” real estate, while earning double digit annualized return. Founded in 1995, we provide sophisticated investors true diversification and transparency in a seamless, low-impact manner. Our proven program benefits investors and advisors alike. Funding more than $280 million in the last 5 years and returning over $18 million in interest to investors as passive income or tax-sheltered growth.
Brad Balter, CEO, Managing Partner Balter Liquid Alternatives, LLC
Hedge Funds Done Right
While we know advisors understand the benefits of liquid alternatives, we recognize there has been excessive “noise” over the past several years as every traditional and non-traditional mutual fund company has tried to enter the space. This makes selection very difficult for the advisor who is trying to assess many investments in multiple arenas for their client base. In order to simplify what we see from our seat, we scrutinized the evolution of the space and broke it into three versions: Version 1.0: When liquid alternatives first emerged they fell into two distinct categories, multi-manager multi-strategy funds and quantitative funds. The common connection was lower quality sub-advisers, watered down portfolios, limited selection, and high fees. Version 2.0: “Brand name” managers began to enter the space but were unwilling to offer strategies managed pari passu to their hedge funds, still leaving watered down portfolios. Fees remained high but were trending lower. Single strategy funds started to emerge but overall fund selection remains limited. Version 3.0: This is the convergence of traditional hedge fund strategies and mutual funds. The onlydifference is the change in the wrapper. These funds can either be strategies managed pari passu to existing hedge fund offerings or outright conversions of hedge funds into mutual funds with a moderation in fees. We believe the “one-size-fits-all” approach will be replaced by specific solutions as the space evolves. As Version 3.0 becomes the standard,advisors will begin to look at liquid alternatives and traditional alternatives holistically in constructing the optimal portfolio for clients. It will no longerbe one or the other, but a blend of both. The LP structure will be reserved for those strategies that are trading in illiquid securities, running highleverage or have a high degree of concentration. For more information, please visit www.balterliquidalts.com
Balter Liquid Alternatives provides institutional hedge fund solutions within ’40 Act mutual funds (liquid alternatives) as they were meant to be—at the intersection of LP vehicles (traditional alternatives) and mutual funds. Our roots are a deep research and due diligence boutique which allows us to partner on an exclusive basis with experienced hedge fund managers across all asset classes. Our key differentiators are capacity constrained strategies managed pari passu (side-by-side as a mirror portfolio) to the LP vehicle. No exceptions. No caveats. What you see is what you get. Mutual fund investing is risky. Before investing, read the prospectus at www.balterliquidalts.com.
NVMBL #311 | CACFL #603J286 | AZ CMB-0932150 | AZ CMBBR-0121055
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b u s in e s s M a n a g e me n t
es tat e p l an n i n g
When Is An Inheritance Too Big?
Rich clients are increasingly pondering this question as they try to create wills that will enhance rather than ruin their children’s lives. By Robert G. Kuchner “ A very rich person should leave his kids enough to do anything but not enough to do nothing.” —Warren Buffett • An 85-year-old former university professor told us that he wanted his will to include a gift to his university. “Why wait?” we asked after reviewing his situation. We designed a structure that allowed him to make the donation and have the pleasure of seeing a chair named after him. • A client owned a piece of historic designated real estate that she wanted to pass on to her family. She did not have the liquidity to just give it to her children, as she needed the tax benefits and a place to sleep, but she was willing to live with reduced benefits as time went by. She transferred the house to an LLC and every year she gifted a share of the LLC to a trust equal to the gift exclusion to her children. However, she got to live in the house and ensure her historic residence stays in the family. • Another client had established a trust for her son. There was a clause in her will—a power
of appointment—that allowed her husband to redirect a portion of their assets. Her intent was to make sure her husband would have financial options—especially the ability to donate to charity. After her death and his remarriage, he exercised the clause—but not for charitable reasons. Instead, he was determined to make null and void the intent of her entire will. He transferred the trust—which carried his son’s name—and all his other remaining assets to his second wife’s children. His own children were left without the trust or any of his assets in their name. As these cases illustrate, creating a legacy is a challenging goal. This is especially true for high-net-worth individuals because of the size of their assets and the complexity of the vehicles they typically use to pass wealth to the next generation. The combination of money, emotion, family history and unresolved issues can be a volatile mix that brings out the
worst in everyone. On the other hand, it can be a tool for sound lessons and wise decisions that strengthen family bonds. Properly planning a client’s legacy requires attention, forethought and good advice—about financial and tax strategies, certainly, but also about the psychological and emotional impact of the decisions made. Should you transfer the bulk of your wealth while you are still alive? What structures and vehicles will you use? What lessons will your children learn—and are they the lessons you want them to learn? Such questions are increasingly prevalent and increasingly urgent because we are in the midst of one of the greatest wealth transfers in history. The transfer of wealth in the U.S. from 1998 to 2052 will amount to at least $41 trillion and could be as high as $136 trillion, according to a study by the Boston College Social Welfare Research Institute. This will have
summer 2016 | private wealth magazine | 49
bu siness Managemen t
a huge effect on not only high-net-worth families, but also on society as a whole. Many people would rather just put these questions aside and defer any decisions. But the cost of inaction or taking too narrow a view on estate planning can be high. Some clients may only wish to focus on minimizing taxes, but it is far more important to have an overall plan. Clients need to know their financial picture, know their children and know what they want to accomplish. Only when they’ve taken a broad view and established their goals can you design an appropriate plan. The emotional side of wealth transfers
Once you get past dealing with your own mortality, what makes the topic of legacies so difficult to discuss? Obviously, generational wealth transfers are not just financial transactions. Transferring wealth raises complex psychological and interpersonal issues that involve life goals and how children relate to them; the value of work versus the benefits of financial security; and long family histories that mix love, fierce conflict, expectations, ambitions, resentment, rebellion and respect. On a more mundane and practical level, transferring wealth to the next generation can create real risk. Inheriting a great deal of money can lead the uninitiated or inexperienced into dangerous behaviors. There is no shortage of cautionary tales: unprepared children who go on spending sprees and who make bad life decisions, such as dropping out of school, quitting jobs and falling into a variety of addictions. They might lose their drive for success, give up on their ambitions and accomplish less than they would have if their wealth had not been guaranteed. Alternatives to sudden wealth transfer
To avoid such outcomes, many highnet-worth individuals are looking for alternative ways to transfer wealth to their children. Warren Buffett’s quote at the beginning of this article illustrates this outlook. Facebook founder Mark Zuckerberg and his wife, Priscilla Chan, recently announced in an open letter to their newborn daughter that they will
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donate 99% of their Facebook holdings, valued at $45 billion, during their lifetime to create the Chan Zuckerberg Initiative, which will seek to “leave the world a better place for you and all children.” Only half of millionaire baby boomers think it’s important to leave money to their children, according to a recent U.S. Trust survey. A third of them said they would rather leave money to charity. In fact, U.S. Trust found that only 32 percent of baby boomers are confident their children will be prepared emotionally and financially to receive a financial legacy. Boomers’ skepticism about large inheritances was also the subject of a recent CNBC article, which reported that boomers want their children to learn about struggle, hard work, failure and the joys of earned success—lessons they believe helped them become more successful. They also had doubts about their children’s ability to handle large sums of money. If clients share these concerns, what are their options? Are there alternatives to a large, lump-sum inheritance that are worth considering? The first step is to think through their concerns about creating an inheritance—not in the abstract, as we’ve done above, but in terms of the clients, their children and the issues that they face. That means thinking about how they as individuals would react to sudden wealth. Would it be an opportunity for the children to prosper? Or would it open the door to dangerous outcomes? The second step is to realize that there are many alternatives to a traditional legacy. As clients review their challenges, some of these alternatives will naturally suggest themselves: • Are there relationship issues? For example, is the family contending with divorces and other social conflicts with friends, ex-wives, the current spouse or in-laws that might result in future problems? The structure of the legacy should take these into account. • Are the children burdened by huge student loans? Before you even begin to think about a legacy, you might consider clearing up this debt. College loans are usually expensive, and repayment comes
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due just as the children are first getting their start in life. A gift of debt relief can be truly meaningful. A parent can use the need for reduction of educational debt as an excuse to delay other gifts until the children mature. • Do the children or grandchildren have a 529 plan? Think about contributing to this as part of a legacy plan. Contributions within the gift tax annual exclusion amount are generally free of both the gift tax and the generation-skipping transfer tax. Qualifying distributions for educational expenses are income-tax-free to the designated beneficiary. • Could you pay for children’s or grandchildren’s tuitions directly to the university, since these are not considered taxable gifts? • Can medical issues for a child or grandchild cause a financial hardship? Consider setting up a special needs trust to ensure proper attention is paid to the child when the client can’t. • Does a child have a drug or gambling problem or other destructive addictions? Consider a trust. In every large lump-sum inheritance, there is the possibility that children may never do another day’s work and spend it all on vices or fast living. If there is already a known risk, why increase the odds of their falling prey to it? A well-managed trust and a good trustee can keep that from happening. These are just a few examples. But they illustrate the kind of thinking you’ll want to do in planning how to pass on a client’s wealth. The point is to take into account the full reality of a family’s situation and think through every option. Clients need to know that they do not need to feel compelled to commit to a onetime, lump-sum wealth transfer. There may be powerful arguments against giving too much, too soon. The planning process must address more than just family issues, of course. There are financial and tax strategies to consider as well. A thorough review will encompass financial planning; tax and legal issues; as well as a client’s goals, hopes, dreams and family realities. Robert G. Kuchner, CPA/PFS, is a partner at the accouting firm Marks Paneth LLP, which is based in New York City. www.pw-mag.com
WEALTH M a n a ge me n t
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The Virtual Estate
Fiduciaries who need access to a deceased client’s digital assets continue to run into a web of obstacles. By Marjorie Suisman
W
hat
does
your
estate look like? Presumably, it includes tangible items that have monetary and possibly sentimental value—real estate, cash, a home library, artwork or the box of photographs under your bed. But does the estate also include items that would be impossible to stash under the bed? By this, I mean electronic assets. Nowadays, bank records may be entirely electronic. Indeed, with the emergence of Bitcoin, currency itself sometimes exists solely in electronic form. Most correspondence is conducted through e-mail, and photographs are shared through digital albums on Facebook and Instagram, among other social networking sites. Our reliance on technology continues to transform our lifestyles, so our concept of what constitutes an estate must adjust with it. The modern estate almost certainly includes digital assets, such as those mentioned above, but although planning for digital assets has become a hot topic in the trusts and estates world, no truly satisfactory solution for handling such assets in an efficient and uniform manner has emerged. One of the issues has to do with access. Unlike a book collection or a photo album, virtually all digital assets are hidden behind user names and passwords. Many people do not save passwords. If
they do keep an updated list, the information is sometimes not recorded in a way that’s readily accessible to a fiduciary when the need to access a client’s assets arises. How can a fiduciary gain access to password-protected assets? Will he or she have to rummage through a sock drawer in hopes of finding password lists? More fundamentally, will a fiduciary even be entitled to access a client’s assets when a
client has either passed away or is unable to give the fiduciary authorization? Providing Access
In looking at what will happen to clients’ digital assets after their death, it is important to distinguish between accounts such as Facebook and Instagram, which hold personal content, and accounts such as iTunes and Kindle,
summer 2016 | private wealth magazine | 51
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which hold content that, technically speaking, does not belong to the client. Some service providers already allow users to arrange posthumous access to their accounts. Google, for example, allows users to select digital heirs or “inactive account managers” for its cloud services, including its popular e-mail service. On the Google account settings page, users can specify what should happen to their Gmail messages and data from several other Google services if their account becomes inactive for any reason. They can choose to have data deleted after three, six, nine or 12 months of inactivity, or you can select
if not all, EULAs stipulate that any rights buyers have to the digital products may not be transferred or assigned to third parties without authorization. The end result is that, as long as heirs have access to an account, they can continue to enjoy the account holder’s content. However, there is no way for a client to legally transfer ownership of those assets to someone else. In contrast, Bitcoins and other digital currencies are considered property and are disposable in a will or estate planning trust. The IRS says Bitcoins should not be treated as currency for tax purposes, so they will get a step-up or step-down in
Most, if not all, EULAs stipulate that any rights buyers have to the digital products may not be transferred or assigned to third parties without authorization. trusted contacts to receive data from Google services. Similarly, Facebook allows users to designate a “legacy contact” to manage an account posthumously. The legacy contacts cannot log in as the account holder or view their private messages, but they can make a post on the account holder’s Facebook page, respond to friend requests, update the cover photo and profile information and archive posts. The legacy contact is also permitted to have the page deleted entirely. Twitter will remove a deceased person’s account, but will not provide account access to the executor or any other person. Accounts that house e-book collections, game purchases and music and video libraries are also considered digital assets, although these are controlled by the original service provider’s end user license agreement (EULA). Under these agreements, when people click “buy” in the Kindle or Apple store, they are not purchasing content, but are instead licensing it for personal use only. Most,
basis at death to the then-current market value. As with other digital assets, fiduciaries should be made aware by clients that they hold Bitcoins and be given the ability to gain access if the need arises—otherwise the currency will die with the clients. Legal Ambiguities
While digital services continue to grapple with posthumous access policies, there is almost no legal guidance or authority to assist executors in identifying, collecting or distributing digital assets. The laws governing access to digital assets are a jumble of federal and state laws, including privacy laws and intellectual property and copyright laws. While several states have laws that authorize fiduciary access to digital assets under certain circumstances, they are limited to specific types of assets, such as the e-mail or online accounts of deceased minors. In 2014, the Uniform Law Commission, a group of attorneys tasked with drafting model legislation, addressed the limited legislative response by releasing the Uniform Fiduciary
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Access to Digital Assets Act (UFADAA). Its purpose was to “vest fiduciaries with the authority to access, control or copy digital assets and accounts.” The goal was “to remove barriers to a fiduciary’s access to electronic records and to leave unaffected other law, such as fiduciary, probate, trust, banking, investment, securities and agency law.” UFADAA created unique rules for four different types of fiduciaries: personal representatives or executors, conservators, attorneys-in-fact and trustees. Access to digital assets was generally permitted to all fiduciaries, although the path to achieving access differed slightly from one to another. More than 27 states were on their way to adopting UFADAA rules shortly after the model legislation was issued, but the efforts ran into opposition from the technology and Internet industries, which felt the proposed laws violated the privacy rights of consumers and improperly overrode the industry’s terms-of-service agreements. Industry groups created their own alternative legislation that greatly restricts fiduciary right of access. In response to the pushback by industry, the Uniform Law Commission revised its model last year. In the 2014 version, a personal representative’s access to digital communications and other digital assets was permitted unless the decedent opted out. Under the 2015 version, however, access to digital communications is not permitted unless the decedent opts in and consents to disclosure before death. Thus, if a person dies without a will, no access will be granted. Access to other digital assets is permitted unless the decedent opts out. Attorneysin-fact, conservators and trustees can still access digital communications and other digital assets, but they face restrictions. The custodians of the assets may, in many instances, require a court order before granting access. Under the 2014 version of the act, boilerplate agreements with a digital service provider limiting a fiduciary’s access to a decedent’s digital assets or accounts were made void by law as Continued on page 59
www.pw-mag.com
we a lt h M a n a g e me n t
i n su r an c e
‘Storm’ Hits Life Insurers
Low interest rates, squeezed profits and longer life spans have created a “perfect storm” for life insurance firms and their policyholders. By David Buckwald and Jeffrey D. Dattolo
W
hen the stock
market plummets, wise investors take action to ensure their assets are diversified and their losses minimized. Life insurance policies should be treated with the same careful attention. That is especially true now, because the insurance industry and policyholders are in the midst of a “perfect storm,” with historically low interest rates, rising life spans and rising insurance costs merging to impact the value of permanent life insurance policies. As an advisor, here is one important thing you need to know: Five insurance companies raised rates in 2015, some by 100% or more. We’ve been recommending policies to clients for years and this is the first time we’ve seen this type of shift. It’s not due to corporate greed. Several factors have contributed to these powerful winds of change, and it’s led to significant rate increases for many consumers. Here are the main trends influencing the changes: 1. Interest rates have been declining and have been at historic lows for over a decade. Unfortunately, economic factors are working against insurance carriers when it comes to providing consistent income. Insurance carriers don’t earn
their revenues primarily from premiums. As much as 50% of their revenue comes from interest-bearing securities, primarily bonds and mortgages. So low interest rates have a direct impact on insurance company profitability. 2. Squeezed policy crediting rates. Insurance companies price life insurance products with interest margins
of 25 to 100 or more basis points, and these have been squeezed and in some cases gone negative. As crediting rates on these older policies cannot be lowered further, this leads to the next issue—rising insurance costs. 3. Rising cost of insurance. Insurance charges are applied not only to recover death claims, but also to recoup
summer 2016 | private wealth magazine | 53
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commissions, cover costs related to issuing and administering each policy and to make a profit. To cover their losses in interest margins, the carriers are being forced to raise costs for certain policies. That’s why five carriers raised their rates in 2015 and why more may follow. 4. People are living longer. Longer life spans used to be a good thing for insurance companies and pol-
just received a notification that the premiums on her permanent life policy would have to be nearly doubled. Mary happens to be a senior citizen on a fixed income. “How can they raise my rates when we agreed on what I was buying?” she asked. “I thought I would be paying the same fee for the life of the policy. Now I don’t know what to do.” Our mission is to stay abreast of chang-
Insurance companies have always had the right to raise rates on policyholders— at least up to the guaranteed maximum for the policy. icyholders. But older policies with higher guaranteed crediting rates are, as we already noted, potentially unprofitable in a low-interest-rate environment. If people live into their 90s, they may also end up having to pay more for their permanent life insurance to maintain coverage. Insurance companies have always had the right to raise rates on policyholders—at least up to the guaranteed maximum for the policy. But in our experience over the past 28 years, that has rarely happened. In fact, the trend was for premium rates to remain unchanged for in-force policies and to go down on new policies. But the situation has reversed itself, and it’s having a major impact on policyholders. Here’s just one example: One of our clients, Mary, a 79-yearold policyholder, called in a panic. She’d
es in the industry and focus on proactive planning for our clients. Yet we were surprised, too. Which made us wonder: If even we were shaken by a 100% increase in Mary’s premium, what was happening to policyholders who don’t have trusted advisors to address the problem? It’s important not to view insurance carriers as the “bad guys” in this scenario. Far from acting as profiteers, they are doing all they can to keep rates as low as possible in an effort to protect their own reputations. But they need enough income to fund each policy and maintain enough financial strength to pay out death claims. In the current environment, raising the cost of insurance is their only option. However, this does not mean that policyholders must just accept the situation and pay up. As with any storm, being proactive can soften the blow.
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Policy Reviews
For advisors, such precautions should include an independent policy review. On the surface, life insurance is pretty basic. You pay a premium for a certain level of coverage and, assuming you continue to pay as scheduled, your beneficiaries receive a benefit when you die. If only it were that simple! When you dig down into the details, life insurance is a highly complex estate-planning tool that requires careful product and carrier selection, in-depth analysis and—perhaps most importantly—periodic review, especially in times of economic and market turbulence. In today’s environment, a careful and independent review of in-force policies is critical to ensure your policy will meet your original projections and provide the coverage your clients expect. An independent review that includes these six steps can pinpoint the most critical policy issues and identify the best possible solutions: 1. Review the policy’s crediting rate: Not all changes in cost are as obvious as a hefty increase in your cost-of-insurance (COI) charge. While most product illustrations include a constant crediting rate, even a small change in that rate can significantly impact the actual performance of your policy. For instance, if the rate was originally at 5%, but the policy is now delivering 4%, especially over a prolonged period of time, you can expect a shorter duration of death benefit coverage, higher premiums to maintain coverage or less retirement cash flow. It’s also important to note that dividend interest rates for whole life policies are not guaranteed— though many are presented that way. Carriers have the freedom to reduce dividend interest rates and raise charges within the dividend. 2. Review the carrier’s financial strength. The rating of an insurance company’s financial soundness is often used as a key differentiator when choosing a policy. But the strength of any business can change. Market downturns can damage company earnings, investment portfolios and capital reserves. Moreover, the ratings are not always easy to interpret. The big three rating www.pw-mag.com
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agencies, Fitch, Moody’s and Standard & Poor’s, each have their own ratings systems, making comparing various carrier ratings as troublesome as comparing bonds. That said, it’s important to balance the carrier rating with expected policy performance. An analogy is that “Aaa” and “Baa” bond ratings at Moody’s both qualify as investment grade, but as long as the bonds do not default, the “Baa” bond will provide over 100 basis points more yield than the “Aaa” bond. The same type of balancing act applies to insurance companies, where you sometimes need to make a trade-off between carrier financial strength and product performance. Also, while life insurance carrier insolvencies are rare, it is always important to review the carrier’s financial strength annually to make sure clients get the death benefits they depend on. 3. Review product charges that impact performance. These charges include a percentage of the premium to cover the costs of issuing and administering the policy and the cost of insurance, primarily to cover death claims. While product charges are subject to guaranteed maximums, it used to be rare for insurance companies to make changes to charges, whether they were increases or decreases. But as we’ve explained, the low-interest-rate environment means that’s no longer the case. Charges can
vary by as much as 80% for different products. A careful review will reveal what is being charged for COI, as well as fixed administration expenses (FAEs), cash-value-based “wrap fees” and premium loads. 4. Stress-test policies with downside scenarios. Stress testing is used to analyze the myriad factors that can cause a policy’s “illustrated” performance to change. A thorough stress test includes building out illustrations to analyze how lower crediting rates may affect the policy—including the revised cash values by year and at maturity. Stress testing can also help identify strategies for protecting the value of the policy. These may include increasing premiums or reducing the face amount of the policy. 5. Assess the client’s ability to fund the policy. The success of any policy is based on the policyholder’s ability to pay the premiums. If funding drops below the original calculations, even for a relatively brief period—something that was all too common during the recent financial crisis—the policy performance and coverage period will be negatively impacted. In a worst-case scenario, the policy can lapse completely—a scenario that is more likely than ever in the face of doubled or tripled premiums. 6. Perform a detailed product comparison. Despite the interest rate environment, many competitive life
insurance products remain available. Some carriers are particularly skilled at proactively managing portfolio yield distribution—a key factor in successfully managing crediting rates and helping to keep in-force policies intact. Other carriers are adept at offering products specifically tailored for the ultra-affluent. Other attributes to consider are the long-term claims-paying ability of the insurance company and the company’s track record in terms of pricing and guaranteed minimum credit ratings. All carriers are suffering the effects of the “perfect storm.” No one is immune. That’s why an independent policy review is imperative to ensure your client’s policy delivers the expected income and death benefit. Even if interest rates start to rise, it will take time to compensate for the damage that’s already been done to carriers’ bottom lines. In the wake of this changing economic environment, it is vital to proactively manage your life insurance to maximize policy performance and protect your ability to achieve your client’s financial goals.
David Buckwald, CFP, CLU, ChFC, CLTC, NSSA, and Jeffrey D. Dattolo, CFP, CLU, ChFC, CLTC, AEP, NSSA, are partners of Atlas Advisory Group LLC, an independent planning firm based in Cranford, N.J., and a member firm of M Financial Group.
SFOs Ante Up On Private Equity Continued from page 15 investing in private equity, more than half expect to increase their allocation in the next year. Of the group that was not investing, nearly 30% plan to allocate to private equity in the coming 12 months. The inclination to increase allocations has several ramifications. First, we may see the demand escalate among single-family offices for interesting and exclusive deals and high-quality funds. This may signal a shift in how significant private wealth will be deployed. But we will also see a growing need for best-in-class tools to facilitate informed decisions. Sourcing opportunities and finding the best managers are
among the biggest challenges facing all investors, whether they are institutions, family offices or wealthy individuals. Second, more investors may take notice of private equity beyond the long-term adherents to the asset class. Typically, ultrawealthy families are private and offer little transparency into what they are thinking and how they are investing. Their attraction to private equity is notable given that family offices are considered proxies for high-net-worth and ultra-high-net-worth investors. As a result, family offices are often viewed as bellwethers by the wealth management community as advisory firms
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continue to develop their offerings in ways that will attract and retain wealthy clients. Hence, wealth advisors who are targeting clients in the upper stratum of wealth will likely take note of the trend toward private equity. Ultimately, single-family offices’ increasing interest in private equity could shape the thinking within the broader industry about this asset class. Hannah Shaw Grove is chief marketing officer of iCapital Network, a financial technology platform that provides streamlined access to private equity and hedge funds for advisors and their high-net-worth clients. www.pw-mag.com
Family Wealth Continuity Continued from page 13 described dreamed of wealth continuity, but he lived in a fantasy world: He wanted to preserve something that may never have existed! While a family office might have been an excellent structure for preserving this family’s wealth and keeping the family together, the absence of any meaningful communication between the two principals and the lack of preparation of the anointed leader of the family office are clear indications that this family’s dream of wealth continuity may not be properly rooted in reality. This is not an uncommon scenario: Wealth creators and family members are frequently advised to create structures such as estate plans, dynasty trusts, family offices or family foundations, but the family itself—the family culture, history or capabilities—may not support the financial structures. Our vignette illustrates the need for a fundamental first step in developing a plan for family wealth continuity: deciding whether continuity across generations makes sense for the family. Here are a few questions that should be addressed in considering the viability of a wealth continuity plan for your client family: the purpose of wealth?
Preserving wealth and family relationships across generations is a noble undertaking, but it is not necessarily the only or the best undertaking for a family. Supporting future generations is one possible purpose of a family’s wealth, but it’s not the only one. And even if supporting future generations is the purpose, there are different ways to get there. A recent article noted that an inheritance of $1,000 could be made to last in perpetuity, with annual distributions of $100 a year, rather than being spent all at once. “Given the choice … a lot of grandparents would prefer that scenario compared to the check and oblivion,” Scott Martin wrote on thetrustadvisor. com website in November. Although these are modest sums, the implication is clear: Money that lasts a
lifetime is preferable to a onetime gift. That may be true in some or even many scenarios, but is that always the case? Is a budding scientist really better off with annual $100 distributions than having the capacity to purchase a $1,000 microscope? Indeed, a onetime gift of a microscope to a young beneficiary might one day result in the creation of far more wealth than yearly distributions—and bring far greater satisfaction to the life of the beneficiary. There are no “one-size-fits-all” solutions when it comes to family wealth continuity. If you are planning to perpetuate wealth over generations, it’s a good idea to have a deep understanding of the purpose and goals of that plan and to be able to communicate them to the family members affected. Whose dream is it?
If wealth continuity is only one person’s dream, then there is relatively little likelihood of the dream persisting over time. The owner of a $500 million company approached us some time ago and asked whether we might assist with business succession planning. But there was a problem he needed to discuss with us: “Our company has been a wonderful success. Our customers and employees love us,” he said. “Our family [members] have grown rich both financially and spiritually and I want this to continue after I am gone. I’ve been planning and preparing and dreaming for years that my oldest son will take over after me. He is terrific.” “That sounds great. What’s the problem?” “He just quit to become an investment banker.” The son had his own dream, a fact the father ignored or was unaware of. Wealth continuity is most likely to be successful if the dream is shared by other family members of multiple generations. Here are a few ways to share the wealth continuity dream: • Have regular and open communication about individual and family goals. • Share stories about the origins of
family wealth. • Ask family members and inheritors about their dreams and wishes for the future. • Identify common areas of interest where the family wealth can be deployed through philanthropic giving, investment, etc. giving family members choices
We worked with a fourth-generation, multibillion-dollar family business where multiple trusts had been created providing distributions to five cousins. The distributions were held in individual investment accounts and the family patriarch made it clear that the only acceptable investment for the cousins was in the family business. The cousins were responsible beneficiaries and were concerned about concentration in a single stock. However, they understood their grandfather’s view of diversification and they were reluctant to raise the issue with him personally or in family meetings. Their dilemma led to significant unrest in the family. When, finally, family advisors encouraged the cousins to put this issue on the agenda at a family meeting, the grandfather surprised everyone by agreeing to the principle of diversification! Perhaps not surprisingly, once the cousins knew they had a choice, the issue went away and they all continued to purchase stock in the family company. However, by reaching an agreement with regard to a wealth management approach, the family was able to arrive at a joint purpose that included multiple generations. Collaborating in managing financial assets strengthened the family’s relationships. All family members shared ownership in the decision, generating a feeling that all contributions were valued and respected. This increased the likelihood that the family’s relationships and financial assets would be preserved. David Lansky, Ph.D., is a principal consultant with the Family Business Consulting Group Inc. His new book, “Family Wealth Continuity: Building a Foundation for the Future,” is available at www.thefbcg.com.
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A Perfect Union
Continued from page 19
Paulina Mejia Head of Wealth Strategies
“Our people are the most important aspect of our business, so we invest in career development and training and give them opportunities to take on more responsibility, authority and reward over time,” he says. “If you have professionals who are willing to run through walls on behalf of the client and they know they have career upside, they will stay with you because they feel engaged, they feel passionate and they feel committed to the vision of what we want to accomplish.” The proof is that quite a few folks from all three legacy organizations remain with Atlantic Trust after all these years, including Donabedian, a Pell Rudman alum. Investing in Atlantic Trust was something CIBC talked about before the acquisition and the bank has delivered, Markwalter reports. In fact, he says that support is the only real change in the CIBC-era. “We have everything we had before, but now we have a great deal more resources. We really believe that coming together with CIBC is going to allow us to take our business to the next level,” he says. The Canadian parent is happy so far, too. “Atlantic Trust’s cash flows have been very, very strong and probably have exceeded our expectations,” Geist says. Indeed, 2015 was a year of record net inflows from clients, as they collectively
added $1.98 billion more to their portfolios than they withdrew. “We think Atlantic Trust has a great growth trajectory,” Geist adds. Readers may wonder whether this well-backed, disciplined, high-caliber competitor is marching toward them. Could be. “Our strategy is not to be on every street corner,” Markwalter says. “Our strategy is to be the dominant wealth management player in each of the top 10 U.S. wealth markets. We’re most of the way there.” The firm’s next target is Dallas. To penetrate a market, Atlantic Trust hits town. Its professionals sit on philanthropic boards and, as a result, they get to know key players in the community. Forming and solidifying collegial relationships with local professionals is essential. “In order to gain referrals from intermediaries like attorneys, CPAs and financial-services professionals, you’ve got to communicate to those professionals your best thinking through white papers, and you’ve got to communicate to them your investment performance. Then you have to get out and meet those professionals. Last year, we hosted over 60 events around the country,” Markwalter says. Some events are primarily geared to practitioners the firm has clients in common with or would like to have. Others feature topics of interest to clients and
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their attorneys and accountants, such as seminars on cyber-security and the outlook for oil. Providing practitioners with intellectual content and insight through publications and presentations generates referrals. “Now add to that referrals from satisfied clients and what happens is the business grows. We get referrals on a daily basis. The secret, if there is a secret, is to do the highest-quality job possible,” Markwalter says. Yet growth presents the firm with its greatest test, namely, maintaining its clients-first culture. Bringing the right people on board to begin with can help to a certain extent. “We have to make sure new team members truly believe that the clients are at the center of all we do and that we put the client’s interest not just in line with our interests, but above our interests,” Markwalter says. There’s more to keeping the culture intact than that, though. About 25% of the workforce has joined the firm within the last two years. “So it’s important for the culture carriers—the people who have built the firm—to spend time with this new generation so that they know what Atlantic Trust’s values are and can keep the culture going,” Markwalter says. From one perspective, the saga of Atlantic Trust reads like a set of banal textbook axioms. Satisfy clients with top-quality work to get repeat business and referrals. Empower staff. Know what you want in a business partner. Leverage professional relationships. But it doesn’t take a lot of reading between the lines to see that strategy and the ability to execute it the way that Atlantic Trust has are not one and the same. “There are only a handful of big things you have to do to be successful as a wealth management firm,” Markwalter concedes. “But what ties those things together and brings them to bear is the culture. The culture is the magic, the pixie dust, the special sauce that makes it all work. As we grow and expand around the country, our biggest challenge is making sure that we preserve our Atlantic Trust culture.” www.pw-mag.com
Death And Taxes
Continued from page 24
are deferred annuities can also be used, he says. “Those strategies can further the goals of the trust and minimize income tax inefficiency,” Parthemer says. Private placement life insurance, for example, has received a lot more attention since ATRA. That’s because there’s a deferral on income tax, and private placement life insurance provides the flexibility to use an investment advisor of choice. A client may also choose to use a lower-turnover portfolio to minimize capital gains. If the average turnover is 40% a year, maybe the advisor can find an allocation that’s more like 20%
a year. By reducing selling and buying, you’re not triggering current gain, so you’re avoiding paying more tax early. Looking into the future, one of the most important things to keep in mind is flexibility, estate planning professionals say. Flexibility in the distribution of a client’s assets can help beneficiaries. While specific distribution schemes that limit a trustee’s or executor’s ability to maneuver assets certainly serve a role, it is important to remember that circumstances change, assets change value and what once was a perfectly reasonable distribution may not make sense given a change in circumstanc-
An Investment To Flip Over ensure that their decisions are executed to their satisfaction. Conclusion
An alternative investment strategy that includes U.S. rare coins provides investors with a cautious, conservative, non-correlated, strategic diversifica-
The Virtual Estate
Continued from page 31
tion option for their portfolios, which is especially significant for those investors challenged with sourcing effective wealth preservation solutions. The U.S. rare coin market has evolved, providing today’s investors with enhanced transparency, liquidity and guarantees of authenticity. Moreover, as an uncor-
related wealth preservation tool, U.S. rare coins can mitigate risk from severe wealth-destroying market events. Michael Contursi is president of RCW Financial, a U.S. rare coin asset management firm in Irvine, Calif. He can be reached at mcontursi@rcwfinancial.com or 949-6791222, ext 217.
Continued from page 52
against public policy. Under the 2015 version, however, a user’s direction prevails over the terms-of-service contract if the direction can be modified or deleted at all times. A user’s direction in a will, trust or power of attorney also prevails over the boilerplate, but if the user provides no direction, the boilerplate provisions of a terms-of-service contract will prevail. Although we do not know how many states will adopt the UFADAA or what form the laws may take, the message is clear: Given the importance of digital assets in everyday living, it is imperative to think through what you want to have happen to your digital assets after your death. At the very least, clients need to communicate their wishes to an estate planner so that their estate planning documents can memorialize their directives. These instructions should include
es. This is especially true in a mobile world where the rules and families are constantly changing. “Governments helping each other enforce each other’s tax laws? That never used to be the case,” Rubenstein says. “When almost anybody who’s a lawyer today went to law school, we were told countries help each other enforce each other’s criminal laws, because you wouldn’t want someone to commit a crime and then escape to your country. But they never helped each other enforce tax laws. That was a domestic issue. Now that’s turned upside down.”
what information should be deleted or destroyed after death. Log-ins and Passwords
In the face of all the uncertainties in the law, it may still be best for clients to avoid these issues altogether by giving their fiduciaries easy access to their log-in information and passwords. This, of course, presents practical problems regarding the storage and format of this information and how to keep it updated and safe. Some websites provide online password storage services, but this solution may be risky since the possibility exists that website security may be compromised. There are also a number of so-called “afterlife management companies” that offer storage and postmortem services. Unfortunately, the staying power of these services is still in doubt. For
example, Legacy Locker, where customers saved online account information and designated beneficiaries for each account, was acquired by PasswordBox, which had a different focus but continued to include Legacy Locker features. But now PasswordBox has been acquired by Intel and the future of the Legacy Locker features under Intel’s ownership is uncertain. Until other solutions emerge and mature, self-management may be a client’s best option for passing on digital assets. This could be as simple as gathering all log-in and digital asset information, storing it on a thumb drive and putting the drive in a safe place that is accessible to fiduciaries if the client passes on. Marjorie Suisman practices in the trusts and estates area at the law firm Davis, Malm & D’Agostine in Boston. She can be reached at msuisman@davismalm.com.
summer 2016 | private wealth magazine | 59
after the facts russ alan prince
Counting The Super-Rich I’m regularly asked about the size of the private wealth market, especially the number of people or families with hundreds of millions of dollars. Along the same lines, I’m asked about the number of single-family offices. Clearly, advisors are looking to determine the number of prospective clients available to them or at least get a feel for the overall opportunity. The answer is that no one has been able to accurately size the market, but if you’re an advisor or even a senior manager in a larger financial institution, it really doesn’t matter. There are a number of consulting organizations and media organizations that calculate the size of the private wealth market. Consulting firms such as the Boston Consulting Group and Capgemini often produce reports on the industry, including calculations on the number of wealthy individuals. Wealth-X is another firm that produces such information. These firms and other ones employ well-reasoned—albeit different—methodologies to produce their numbers. But there are issues with the underlying assumptions in these methodologies. The result is highly erudite estimates that, in the final analysis, are just that—only estimates. Consider the billionaire population. Depending on whose numbers you’re looking at, there are somewhere between 1,700 and 2,100 billionaires in the world. None of these estimates likely included Sergei Roldugin. Who is Sergei Roldugin? In 2014, he informed The New York Times that he did not have millions of dollars. Then the Panama Papers came along and revealed that Sergei (or at least his name) is connected to $2 billion in an interlaced network of offshore companies. The Panama Papers leak has named names that are not counted by firms that track the super-rich. In all likelihood, there are more rich people—especially super-rich people—than are cited by the consulting firms or media organizations. Many rich people hire lawyers and accountants to obfuscate and even hide their wealth, making the process of counting them increasingly difficult. As for single-family offices, industry pundits provide esti60 | private wealth magazine | summer 2016
mates ranging from 2,000 to 15,000. I’m very confident there are more than 2,000 single-family offices because that’s how many I have in my database and I’m absolutely certain my database is incomplete. Moreover, if you use a liberal definition of a single-family office, you’ll probably end up with more than 15,000 of them. For advisors, these estimates—even if they were precise— are pretty much worthless. For a wealth management practice, what difference does it make if there are 1,700 billionaires or 1,900 or 2,100? If there were 5,000 or 10,000 single-family offices, what difference would it make to an advisor? Let’s look at “numbers” another way. For your services and products, how many super-rich clients or single-family offices do you have to be working with to do astoundingly well? Ten? Five? Three? One? In all likelihood, a handful of these amazingly wealthy clients would translate into a hyper-successful advisor practice. The world population of super-rich or single-family offices is not really important to an advisor. What is important is finding a small number of them and making them your clients. www.pw-mag.com
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